2014 BONDHOLDERS REPORT

Transcription

1 2014 BONDHOLDERS REPORT

2 2014 BONDHOLDERS REPORT TABLE OF CONTENTS 1 Introduction Financial Report 3 Supplemental Bondholder Information Students & Enrollment Faculty & Other Data Endowment & Other Resources Future Debt Service Continuing Disclosure Information 4 Supplemental Financial Reports General Revenues Housing and Food Services Student Facilities Fees Seattle Campus Commuter Services Intercollegiate Athletics UW Medical Center Harborview Medical Center Metropolitan Tract Cover photo courtesy of Jim Clark.

3 University of Washington Office of the Treasurer of the Board of Regents 2014 BONDHOLDERS REPORT This report includes financial and operating information on the University of Washington most often requested by bondholders, lenders, underwriters and credit rating agencies. As a preface to reviewing the materials, we suggest starting with the University s Financial Report, which highlights the accomplishments, opportunities and challenges facing the University of Washington as one of the nation s premier research universities. The enclosed audited financial statements are for June 30, 2014 the University of Washington s fiscal year end. Certain enrollment and other data are for Autumn The 2014 Bondholders Report should meet your information needs. However, if you have comments, questions, or need additional information, please contact us using the contact information shown below. Bill Starkey Annette Sommer Senior Associate Treasurer Associate Treasurer (206) (206) starkeyb@uw.edu asommer@uw.edu Alana Askew Scott Selfridge Assistant Treasurer Analyst (206) (206) alana01@uw.edu sms44@uw.edu The information presented in this report is not intended to cover all material information that may be relevant to the outstanding bonds of the University of Washington. The information contained herein has been obtained from University officers, employees, records and other sources believed to reliable. The University of Washington is under no legal obligation to provide the bondholder report, nor should it be construed that the University will provide such information in whole or in part in the future th Avenue NE, Suite 600 Seattle, Washington Phone: (206) Fax: (206)

4 2014 FINANCIAL REPORT

5 TABLE OF CONTENTS 1 INSIDE BACK COVER INDEPENDENT AUDITORS REPORT 3 MANAGEMENT S DISCUSSION AND ANALYSIS 12 FINANCIAL STATEMENTS 16 NOTES TO FINANCIAL STATEMENTS BOARD OF REGENTS AND ADMINISTRATIVE OFFICERS UNIVERSITY FACTS STUDENTS FISCAL YEAR 2014 Academic Year FISCAL YEAR 2009 Academic Year FISCAL YEAR 2004 Academic Year Autumn Enrollment 1 Undergraduate 37,895 34,076 32,355 Graduate 13,177 11,453 10,591 Professional 2,000 1,847 1,803 TOTAL 53,072 47,376 44,749 Extension course and conference registrations 75,412 62,447 39,263 Number of Degrees Awarded Bachelor s 9,921 8,458 8,517 Master s 3,925 2,988 2,797 Doctoral Professional TOTAL 15,171 12,627 12,319 FACULTY 1 (Professorial, Instructional, Research) 4,497 4,101 3,553 FACULTY AND STAFF 2 26,538 24,808 19,611 RESEARCH FUNDING ALL SOURCES (in thousands of dollars) $ 1,385,000 $ 1,150,000 $ 954,000 SELECTED REVENUES (in thousands of dollars) Patient Service and Other Medical-Related Revenues 3 $ 2,042,029 $ 1,035,731 $ 720,692 Gifts, Grants, and Contracts 1,392,561 1,123, ,863 Tuition and Fees 4 838, , ,189 Auxiliary Enterprises and Other Revenues 556, , ,931 Investment Income (loss) 480,645 (469,492) 219,831 State Appropriations 262, , ,618 SELECTED EXPENSES (in thousands of dollars) Medical Related 3 $ 1,831,649 $ 949,186 $ 729,003 Instruction, Academic Support, and Student Services 1,377,126 1,207, ,749 Research and Public Service 807, , ,607 Institutional Support and Physical Plant 425, , ,986 Auxiliary Enterprises 285, , ,020 CONSOLIDATED ENDOWMENT FUND 5 (in thousands of dollars) $ 2,833,000 $ 1,649,000 $ 1,208,000 SQUARE FOOTAGE 6 (in thousands of square feet) 21,836 18,036 17,493 1 Headcount 2 Full time equivalents 3 Includes Valley Medical Center and Northwest Hospital (2014 only) 4 Net of scholarship allowances of $139,776,000 in 2014, $82,813,000 in 2009 and $46,519,000 in Stated at fair value 6 Gross square footage, all campuses

6 KPMG LLP Suite Eighth Avenue Seattle, WA INDEPENDENT AUDITORS REPORT The Board of Regents University of Washington: We have audited the accompanying financial statements of the business-type activities of the University of Washington (the University), an agency of the state of Washington, which comprise the statements of net position as of, and the related statements of revenues, expenses, changes in net position and cash flows for the years then ended, and the related notes to the financial statements, as well as its discretely presented component units as of and for the years ended. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. As discussed in note 1, the financial statements of the University of Washington, an agency of the state of Washington, are intended to present the financial position, and the changes in financial position and where applicable, cash flows of only the respective portion of the activities of the state of Washington that is attributable to the transactions of the University of Washington and its discretely presented component units. They do not purport to, and do not, present fairly the financial position of the state of Washington as of, the changes in its financial position or, where applicable, its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity. FINANCIAL REPORT 2014 / 1

7 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Washington as of, and the changes in its financial position and its cash flows for the years then ended, and the financial position of its discretely presented component units as of, and the changes in their financial position for the years then ended in accordance with U.S. generally accepted accounting principles. Other Matter U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 3 through 10 be presented to supplement the basic financial statements. Such information, although not part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of the financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries with management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Seattle, Washington October 31, 2014 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity. UNIVERSITY OF WASHINGTON / 2

8 MANAGEMENT S DISCUSSION AND ANALYSIS The discussion and analysis below provides an overview of the financial position and activities of the University of Washington (University) for the years ended. This discussion has been prepared by management and should be read in conjunction with the financial statements and accompanying notes that follow this section. Financial Highlights for Fiscal Year 2014 The University recorded an increase in net position of $478 million in fiscal year 2014; $55 million more than the fiscal year 2013 increase of $423 million. This is primarily related to an increase in investment income of $140 million in fiscal year 2014, a result of increased investment market values during the year. The University adjusts the carrying value of investments to market value each year, with the change recorded as investment income or loss. Revenues from tuition and patient services continued to show growth during 2014, while revenues from research activities decreased slightly. Key Financial Results for Fiscal Years 2014, 2013 and 2012 (in millions) Total operating revenues $ 3,914 $ 3,783 $ 3,522 Total operating expenses 4,384 4,121 3,911 Operating loss (470) (338) (389) State appropriations Investment income Gifts Other nonoperating revenue (1) (expense), net Increase in net position Net position, beginning of year 6,165 5,742 5,728 Net position, end of year $ 6,643 $ 6,165 $ 5,742 Operating revenues minus operating expenses typically result in an operating loss in the University s financial statements. Nonoperating items, however, including state support, investment income, and gifts have typically enabled the University to reflect an increase in the net position, or equity each year. This surplus has been reinvested within the University to add a margin of educational excellence, upgrade the University s facilities and provide a prudent reserve for contingencies such as the recent period of economic instability. Economic Factors Affecting the Future A number of contingencies face the University over the next few years. The slow economic recovery is a primary source of uncertainty. The state of Washington, which provided 5% of the University s total revenues in fiscal year 2014, continues to emerge from the recession. The effect of required increases to K-12 funding over the next several years, together with other economic factors such as slow growth and insufficient tax revenues, could result in added uncertainty for other state programs, including higher education. The University s 2015 general operating appropriation from the state (excluding amounts appropriated for specific purposes) is approximately $246 million, a slight decrease from 2014, which was $40 million higher than the prior year. In exchange for biennial increases in state funding, the University committed to freezing tuition rates for resident undergraduate students. The University s Board of Regents continues to have broad tuition and fee setting authority, including undergraduate resident tuition. State funding for capital appropriations continues to be under pressure, though some state bonding capacity was provided this biennium for critical renovation projects. Since 2009, Federal ARRA funding for basic research and activities in the health sciences has totaled $368 million. The University has $15 million of unspent ARRA awards that will be expended in fiscal year 2015 or later. The federal budget remains under significant pressure; ongoing federal funding for research could be impacted. Rising benefit costs, particularly for healthcare and pensions, continue to impact the University as well. Employer pension funding rates for the state pension increased 28% to 9.2% of covered salary during fiscal year 2014, and are likely to continue increasing over the next few years. In March 2010, healthcare reform was passed by the U.S. Congress and signed into law by President Obama. While the major changes in coverage took effect beginning in 2014, there may be significant changes by the state and federal government to implementation plans for healthcare reform still occurring in this next fiscal year. Thus, the environment in which healthcare organizations currently operate is dynamic and uncertain. Using the Financial Statements The University s financial statements include the Statements of Net Position, the Statements of Revenues, Expenses and Changes in Net Position, the Statements of Cash Flows and the Notes to the Financial Statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) principles, which establish standards for external financial reporting for public colleges and universities. GASB standards require that financial statements be presented on a consolidated basis in order to focus on the University as a whole. On January 1, 2010, the University affiliated with Northwest Hospital & Medical Center (Northwest Hospital). GASB standards require that this entity be presented as a discrete component unit; therefore, its financial position at, and the results of its operations for the years ended June 30, 2014 and 2013, are included with Valley Medical Center in a separate column for financial statement presentation purposes (see Note 1 and Note 18 to the Financial Statements). On July 1, 2011, the University affiliated with Valley Medical Center, a Washington public hospital district which owns and operates a 321-bed full-service acute care hospital and 45 clinics located throughout southeast King County. Valley Medical Center Unaudited see accompanying notes to basic financial statements FINANCIAL REPORT 2014 / 3

9 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) is also being reflected as a discrete component unit; therefore its financial position and the results of its operations are included with Northwest Hospital in a separate column for financial statement presentation purposes (see Note 1 and Note 18 to the Financial Statements). The analysis presented below includes the consolidated balances of the University of Washington and its blended component units (see Note 1), but excludes the financial position and results of operations of its discrete component units (Northwest Hospital and Valley Medical Center), unless otherwise noted. Financial Health STATEMENTS OF NET POSITION The Statements of Net Position present the financial condition of the University at the end of the last two fiscal years and report all assets, liabilities and deferrals of the University. A summarized comparison of the University s assets, liabilities, deferred outflows and net position as of June 30, 2014, 2013 and 2012, follows: (in millions) Current Assets $ 1,537 $ 1,459 $ 1,161 Noncurrent assets: Capital assets, net 4,045 3,976 3,618 Other 4,317 3,732 3,624 Total assets 9,899 9,167 8,403 Deferred Outflows 14 Total Assets and Deferred Outflows 9,913 9,167 8,403 Current liabilities Noncurrent liabilities 2,398 2,273 1,933 Total liabilities 3,270 3,002 2,661 Net position $ 6,643 $ 6,165 $ 5,742 The excess of current assets over current liabilities of $665 million in 2014 and $730 million in 2013 reflects the continuing ability of the University to meet its short-term obligations. Current assets consist primarily of cash, short-term investments and accounts receivable. Current assets increased $78 million in 2014, due primarily to a year-end receivable from Sound Transit for revenue to mitigate capital costs associated with relocating University research activities impacted by the Light Rail tunnel beneath campus. Current assets increased $298 million in 2013, due to increases in the value of cash and short-term investments. The short-term portion of the University s investment portfolio can fluctuate based upon changes in investment mix and the expected short-term needs for University funds. Long-term investments, a component of noncurrent assets, increased $591 million during 2014 and $91 million during 2013, as a result of market value changes during each year for the University s investments. Realized and unrealized gains in fiscal year 2014 totaled $398 million, versus $264 million of realized and unrealized gains in The difference between total assets and deferred outflows, and total liabilities and deferred inflows, is referred to as net position or equity and is one indicator of the current financial condition of the University. The change in net position measures whether the overall financial condition has improved or deteriorated during the year. The University reports its equity in four categories: Net Investment in Capital Assets This is the University s total investment in capital assets, net of accumulated depreciation and amortization and outstanding debt obligations related to those capital assets; Restricted Net Position: Nonexpendable net position, primarily endowments, consists of funds on which the donor or other external party has imposed the restriction that the corpus is not available for expenditures but rather for investment purposes only; Expendable net position consists of resources which the University is legally or contractually obligated to spend in accordance with time or purpose restrictions placed by donors and/or other external parties; Unrestricted Net Position This is all other funds available to the University for any purpose associated with its mission. Unrestricted net position is often internally designated for specific purposes. The University s net position at June 30, 2014, 2013 and 2012 is summarized as follows: (in millions) Net investment in capital assets $ 2,018 $ 2,038 $ 2,113 Restricted: Nonexpendable 1,257 1,183 1,116 Expendable 1,629 1,345 1,162 Unrestricted 1,739 1,599 1,351 Total net position $ 6,643 $ 6,165 $ 5,742 Net investment in capital assets decreased $20 million, or 1%, in 2014, and $75 million, or 4%, in This balance increases as debt is paid off or when the University funds fixed asset purchases without financing. This balance decreases as assets are depreciated. Restricted nonexpendable net position increased $74 million, or 6%, in 2014, and $67 million, or 6%, in For both years the increase reflects the receipt of new endowment gifts, and the recovery of unrealized losses on underwater endowments due to increases in market values during the year. Restricted expendable net position increased $284 million, or 21%, in 2014, and $183 million, or 16%, in This category is primarily affected by new operating and capital gifts, and earnings or losses on restricted investments, including endowments. The increase in market value for the Consolidated Endowment Fund was the main reason for the increase during both years. Unaudited see accompanying notes to basic financial statements UNIVERSITY OF WASHINGTON / 4

10 Unrestricted net position increased by $140 million, or 9%, in 2014, due primarily to unrealized earnings on the Diversified Investment Pool, and revenue from Sound Transit to mitigate capital costs associated with relocating University research activities impacted by the Light Rail tunnel beneath campus. Unrestricted net position increased $248 million or 18%, in 2013, due in part to auxiliary and medical-related margins, as well as overall conservative spending. The ratio of expendable financial resources to operations (as defined by Moody s Investors Service) measures the strength of net position as the coverage of annual operating expenses by financial resources that are ultimately expendable. This ratio, illustrated in the chart below, shows that in 2014 the University had enough expendable resources from various sources to fund operations for a period of 9.9 months. MONTHS OF COVERAGE Expendable Financial Resources to Operations Moody s Public Universities (Aaa median 2013) Endowment and Other Investments Investment returns provide an important source of revenue for the University s programs. Among the funds invested by the University are endowments, operating reserves, life income trusts, annuities and gifts. Endowed gifts supply permanent capital and an ongoing stream of current earnings to the University. Most endowments are commingled in the Consolidated Endowment Fund (CEF), a diversified investment fund. As in a mutual fund, each individual endowment maintains a separate identity and owns units in the fund. The CEF has experienced considerable growth over the past 10 years due to new gifts and endowment returns. The number of individual endowments in the CEF has grown to 4,211 and the market value of the CEF has doubled, rising from $1.4 billion at June 30, 2005 to $2.8 billion at June 30, The impact to program support has been substantial, with $783 million distributed over the past 10 years touching every part of the University. Programs supported by endowment returns include academic programs, scholarships, fellowships, professorships, chairs and research activities. Under the Board of Regents approved long-term spending policy for the CEF, quarterly distributions to programs are made based on an annual percentage rate of 4%, applied to the five-year rolling average of the CEF s market valuation. An additional 1% is distributed to support fundraising and stewardship activities (0.80%) and investment management (0.20%). Similar to program distributions, the fee is based on the endowment s five-year average market value. Endowment portfolios are commonly managed around a core set of objectives focused on the need to provide support for endowed programs in perpetuity. The Board of Regents, in conjunction with the University of Washington Investment Committee (UWINCO), establishes the policy asset allocation judged to be most appropriate for the University from a long-term potential return and risk perspective. The policy asset allocation is reviewed annually for its continuing fit with the University s risk profile and with consideration of the changing dynamics of the capital markets. The CEF asset allocation includes two clearly defined categories of investments: those which facilitate growth or appreciation (Capital Appreciation), and those which preserve endowment values (Capital Preservation). At June 30, 2014, 75% of the CEF was invested in Capital Appreciation and 25% in Capital Preservation. For the fiscal year ended June 30, 2014, the CEF earned an investment return of +15.8%, representing strong absolute performance but underperforming a passive blended benchmark (70% MSCI ACWI and 30% BC Gov t Bond). Individual CEF strategy performance was mixed, but relative performance was most negatively impacted by Emerging Markets, which experienced another difficult year with geopolitical instability and slowing growth in China. Emerging Markets, however, have begun turning around and remain the top-performing asset class over the past decade. Intermediate-term returns for the CEF have improved substantially as the global financial crisis rolls off, resulting in a five-year average of +11.2%. Performance over the ten-year period remains solid, with the CEF returning an annual average of +8.0%. 1 The sum of Unrestricted Net Position and Restricted Expendable Net Position, divided by Total Operating Expenses (Operating Expenses plus interest expense). The result is multiplied by 12 to arrive at months of coverage. Net Position amounts include Northwest Hospital and Valley Medical Center. Unaudited see accompanying notes to basic financial statements FINANCIAL REPORT 2014 / 5

11 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) A portion of the University s operating funds are invested in the CEF. As of June 30, 2014 these funds comprise $669 million of the CEF market value. The University takes its role of financial stewardship seriously and works hard to manage its financial resources effectively. Continued high credit ratings are important indicators of the University s success in this area. $2,800 Consolidated Endowment Fund Market Value (in millions) $2,833 Moody s Fiscal Year 2013 Public College and University Rating Distribution (As of the July 2014 Moody s Median Report) Aaa UW 8 $2,300 $2,347 $2,161 $2,168 $2,098 $2,111 Aa1 Aa IN MILLIONS $1,800 $1,700 $1,649 $1,830 Aa3 A A2 25 $1,300 $1,366 A3 18 Baa1 8 Baa2 2 $ Ba1 1 Ba2 1 Debt and Related Capital Improvements The University s general revenue borrowing platform, established in 2003, has been used to fund buildings that support the educational, research and service missions of the institution. The University s debt portfolio consists primarily of fixed rate debt, including General Revenue Bonds, Lease Revenue Bonds and state issued bonds, as well as variable rate debt such as commercial paper. Credit ratings are a reflection of the University s strength. During fiscal year 2014, the University was rated Aaa (the highest rating) by Moody s Investors Service and AA+ (with a positive outlook) by Standard & Poor s. These strong ratings carry substantial advantages for the University: continued and wider access to capital markets when the University issues debt, lower interest rates on bonds and the ability to negotiate favorable bond terms. Caa NUMBER OF INSTITUTIONS In September 2013, the University issued $146 million of General Revenue Bonds with an average coupon rate of 4.96%. In January 2014, the University refunded Lease Revenue bonds with an average interest rate of 5.07%, with $29 million in tax-exempt bonds with an average interest rate of 4.37%. During fiscal year 2014, debt-related capital expenditures included $63 million for the renovation and expansion of Husky Stadium, $52 million for the construction of new student housing and $38 million for the construction of a new academic building at the UW Bothell Campus. Unaudited see accompanying notes to basic financial statements UNIVERSITY OF WASHINGTON / 6

12 Key projects substantially completed in 2014 include: Major renovation of Husky Stadium, including demolition and relocation of the stadium s original lower seating bowl and significant upgrades to other areas including a new south grandstand. The project also included development of a Football Operations Support Building, relocation of the track and other related improvements, and coordination with the construction for the Sound Transit Station and Tunnel. New residence hall and apartments built as part of Phase 2 of the Housing Master Plan. New academic building at the UW Bothell Campus which includes a mix of instructional spaces, laboratory facilities, faculty offices and support spaces for at least 600 new student FTEs. During fiscal year 2013, debt-related capital expenditures included $147 million for the renovation and expansion of Husky Stadium, $116 million for construction of new student housing, $24 million for the expansion of UWMC, and $19 million for the renovation of the Husky Union Building. One measure of the University s ability to repay debt is the ratio of expendable resources to debt. The 2014 ratio of expendable financial resources to debt (as defined by Moody s) shows that the University has sufficient expendable resources to pay its long-term debt obligations 1.6 times over. (in millions) Total operating revenues $ 3,914 $ 3,783 $3,522 Total operating expenses 4,384 4,121 3,911 Operating loss (470) (338) (389) Nonoperating revenues, net of expenses Other revenues Increase in net position Net position, beginning of year 6,165 5,742 5,728 Net position, end of year $ 6,643 $ 6,165 $ 5,742 The University has a diversified revenue base. No single source generated more than 27% of the total fiscal year 2014 revenues of $5.0 billion. 10% INVESTMENT INCOME 4% SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 5% AUXILIARY ENTERPRISES 4% GIFTS Sources of Funds 4% OTHER 17% TUITION AND FEES 5% STATE FUNDING FOR OPERATIONS AND CAPITAL EXPENDITURES 27% GRANTS AND CONTRACTS 24% PATIENT SERVICES Expendable Financial Resources to Direct Debt 2 RATIO Moody s Public Universities (Aaa median 2013) STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION The Statements of Revenues, Expenses and Changes in Net Position present the University s results of operations and nonoperating items that result in the changes in net position for the year. In accordance with GASB reporting principles, revenues and expenses are classified as either operating or nonoperating. A condensed comparison of the University s revenues, expenses and changes in net position for the years ended June 30, 2014, 2013 and 2012 follows: The following table summarizes revenues from all sources for the years ended June 30, 2014, 2013 and 2012: (in millions) Tuition and fees $ 839 $ 808 $ 681 Patient services 1,207 1,162 1,098 Grants and contracts 1,327 1,364 1,353 Sales and services of educational departments Auxiliary enterprises State funding for operations Gifts Investment income State funding for capital projects Other Total revenue all sources $ 4,953 $ 4,622 $ 3,984 Beginning in fiscal year 2014, UW Medicine information technology began operating as a self-sustaining activity of the University (ITS department). Capital and operating costs are being recorded centrally and recovered through user fees charged to the consumers 2 The sum of Unrestricted Net Position and Restricted Expendable Net Position, divided by total capital lease obligations, bonds and notes payable outstanding. Includes Northwest Hospital and Valley Medical Center. Unaudited see accompanying notes to basic financial statements FINANCIAL REPORT 2014 / 7

13 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) of technology resources, primarily UWMC and Harborview Medical Center (HMC). As a result, the University has recorded $60 million of user fees for services provided to external parties, primarily HMC, which are reflected as Auxiliary Enterprises revenue in fiscal year Grant Revenue The largest source of revenue (27%) continues to be grants and contracts. This revenue decreased $37 million, or 3% in 2014, compared to an increase of $11 million, or 1%, in Revenues generated by Federal ARRA research funding decreased to $12 million in fiscal year 2014, compared to $32 million in 2013, and contributed to the overall decrease in grant revenue. Grants and contracts provide the opportunity for graduate and undergraduate students to work with nationally recognized faculty in research as part of their educational experience. Grant and contract revenue is earned when direct expenditures (such as researchers compensation or purchases of goods and services) are made; therefore, there is little effect on the University s operating margin as a result of this direct expense reimbursement process. Facility and administrative (F&A) expenses necessary to support grants and contracts are reimbursed by sponsors, along with direct costs, by an indirect cost recovery. The current F&A, or indirect cost recovery, for research grants is approximately 29 cents on every direct expenditure dollar. Primary Nongrant Funding Sources The University relies primarily on student tuition and fees and state appropriations as revenue sources to support its nongrant funded educational operating expenses. State support for education increased during fiscal year 2014, but is still significantly below historical levels. Operating Support for Instruction (in millions) State operating appropriations $ % $ % $ % Operating Tuition and fees % % % Fees for self-sustaining educational programs % % % Total educational support $1, % $1, % $ % Noncapital state appropriations are considered nonoperating revenue under GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities, and are reflected in the nonoperating section of the Statements of Revenues, Expenses and Changes in Net Position; however, they are used solely for operating purposes. Tuition and fees, net of scholarship allowances, increased to $839 million in 2014, from $808 million in 2013 and $681 million in The increases were primarily due to increased enrollment in 2014 and 2013, and a 16% increase in average undergraduate resident tuition rates during Tuition increases were partially offset by the increase in scholarships and fellowships, and scholarship allowances of $2 million in 2014, $36 million in 2013, and $49 million in Self-sustaining educational programs (Fee-Supported Programs) include the following amounts for each of the fiscal years 2014, 2013 and 2012: UW Educational Outreach (the continuing education branch of the University), $96 million, $98 million and $85 million, respectively, summer quarter tuition $42 million, $48 million and $47 million, respectively, and for Business School and School of Medicine programs $45 million, $40 million and $38 million, respectively. Patient Services-UW Medicine The financial statements of the University include the operations of the School of Medicine, three hospitals, associated physicians and clinics, Airlift Northwest, and the University s share of two joint ventures. These entities, together with Harborview Medical Center (not included in the University s financial statements see Footnote 13) comprise UW Medicine, an umbrella organization serving to coordinate these activities and promote quality healthcare in the Pacific Northwest and beyond, and to conduct cutting-edge medical research with worldwide benefit. Patient care activities included in the University s financial statements include: UW Medical Center (UWMC) is a 450-bed hospital that provides comprehensive healthcare services to the Puget Sound community and patients from throughout the Pacific Northwest. UWMC also serves as the major clinical, teaching and research site for students and faculty in the Health Sciences at the University. Over 18,000 patients receive inpatient care at UWMC each year. Specialized inpatient care needs are met by the Cancer Center, the Regional Heart Center, the Neonatal Intensive Care Unit (NICU) and the Organ Transplantation program. Strategic growth initiatives were implemented in fiscal year 2014 with the expansion of primary care and urgent care, the opening of the Eastside Specialty Center and other clinics, as well as continued progress on Phase 2 of the UW Medical Center Montlake Tower. Fiscal year 2013 marked the completion of Phase 1 of the UW Medical Center Montlake Tower. This project included updating and expanding the NICU from 36 to 50 beds, adding an additional 30 Oncology beds as well as state of the art interventional radiology and hybrid operating and interventional procedure rooms. Valley Medical Center (VMC) is a 321-bed acute care hospital and network of 45 clinics, treats nearly 17,000 inpatients per year, and is the oldest and largest public district hospital in the state of Washington. VMC joined UW Medicine in July VMC s Statement of Net Position and Statement of Revenues, Expenses and Changes in Net Position are presented in a discrete column together with NWH on the financial statements of the University. Unaudited see accompanying notes to basic financial statements UNIVERSITY OF WASHINGTON / 8

14 Northwest Hospital & Medical Center (NWH) is a full-service medical facility with 281 beds, and treats approximately 10,000 inpatients per year. NWH joined UW Medicine in January NWH s Statement of Net Position and Statement of Revenues, Expenses and Changes in Net Position are presented in a discrete column together with VMC on the financial statements of the University. UW Neighborhood Clinics (UWNC) is a network of primary-care clinics with nine neighborhood locations throughout the greater Seattle area, providing primary and selected specialty care with a staff of nearly 85 healthcare providers. The revenues, expenses, assets and liabilities of UWNC are included in the University s financial statements. UW Physicians (UWP) is the physician practice group for more than 1,800 faculty physicians and healthcare providers associated with UW Medicine. The revenues, expenses, assets and liabilities of UWP are included in the University s financial statements. Airlift Northwest is the preeminent provider of air medical transport services in the Pacific Northwest. The revenues, expenses, assets and liabilities of Airlift Northwest are included in the University s financial statements. The University is also a participant in two joint ventures: Seattle Cancer Care Alliance and Children s University Medical Group. The University s share of these activities is reflected in the University s financial statements. In combination, these organizations (not including VMC and NWH) contributed $1,207 million in patient services revenue in fiscal year 2014, $1,162 million in fiscal year 2013 and $1,098 million in UWMC generated 77% of this revenue in 2014, 76% in 2013 and 77% in UWMC admissions were approximately 18,000 in 2014, a slight increase from 2013 which was a 1.1% decrease from Average patient length of stay, however, remained the same as in 2013 at 6.9 days, up from 6.7 days in Considerable progress has been made in implementing the Epic Electronic Medical Record (EMR) system throughout UW Medicine, with over 85 specialty clinics completed in May This milestone allowed UW Medicine to qualify for Medicare and Medicaid financial incentives, avoid penalties, and improve the quality and safety of care for patients through more timely and complete access to their records. To further enhance patient safety, UW Medicine also implemented bar-coded electronic medication administration in all high risk inpatient units at UWMC. Charity care decreased as a result of the Medicaid expansion and implementation of the Healthcare Exchanges effective January 1, The number of uninsured patients served at UW Medicine declined and was accompanied by an increase in Medicaid patients. VMC operating results were negatively impacted in fiscal year 2013 by expenses associated with implementation of the EMR, and a reduction in tax levy revenues. Gifts, Endowments and Investment Revenues Net investment returns for the years ended June 30, 2014, 2013 and 2012 consisted of the following: (in millions) Interest and dividends $ 73 $ 71 $ 63 Metropolitan Tract net income Investment in Seattle Cancer Care Alliance Net appreciation (depreciation) of fair value of investments (35) Investment expenses (10) (8) (8) Net investment income $ 481 $ 341 $ 34 Net appreciation includes both realized and unrealized gains and losses. The unrealized gains, however, are not available until the underlying securities have been sold. Net investment income increased by $140 million in 2014, compared to an increase of $307 million in The change in realized and unrealized gains and losses was the major factor in the variance each year. Donor support increased by $13 million, or 7%, to $191 million in 2014 from $178 million in Gifts are a key and necessary source of support for a variety of purposes including capital improvements, scholarships, research, and endowments for various academic and research positions. Expenses Two primary functions of the University, instruction and research, comprised 41% of total operating expenses. These dollars provided instruction to more than 53,000 students and funded 5,300 research awards. Medical-related expenses, such as those related to patient care, also continue to be one of the largest individual components. 7% DEPRECIATION/ AMORITIZATION 24% MEDICAL RELATED 7% AUXILIARY 3% SCHOLARSHIPS & FELLOWSHIPS 5% OPERATION & MAINTENANCE OF PLANT 5% INSTITUTIONAL SUPPORT Uses of Funds 1% OTHER 24% INSTRUCTION 17% RESEARCH 7% ACADEMIC SUPPORT Unaudited see accompanying notes to basic financial statements FINANCIAL REPORT 2014 / 9

15 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) A comparative summary of the University s expenses by functional classification (purpose for which the costs are incurred) for the years ended June 30, 2014, 2013 and 2012 follows: (in millions) Operating expenses: Educational and general instruction $ 1,037 $ 988 $ 936 Research Public service Academic support Student services Institutional support Operation and maintenance of plant Scholarships and fellowships Auxiliary enterprises Medical-related 1, Depreciation/amortization Total operating expenses $ 4,384 $ 4,121 $ 3,911 Academic support increased $36 million, or 14%, during fiscal year 2014 due primarily to increased support of activities in the Schools of Medicine and Dentistry, and the College of the Environment. These costs include startup costs to establish new labs and hiring of new employees. Auxiliary enterprises increased $82 million, or 40%, during fiscal year 2014 due primarily to the addition of ITS self-sustaining activities. Technology services provided to external parties, primarily HMC, during the year totaled $63 million, and are being recovered through offsetting user fees reflected in Other Auxiliary Enterprises revenue. Costs incurred by Intercollegiate Athletics for its football program, related to additional game day services and noncapital improvements made to Husky Stadium and the Husky Ballpark, also contributed to the increase during Overall, the University s operating expenses increased by $263 million, or 6%, over Salaries expense increased $132 million, or 7% due to employee merit increases and the addition of ITS department salaries of $40 million. Benefits expense increased by $52 million, or 8%, due to increased salary expenditures together with a mandated increase to the University s PERS pension contributions during the year. Purchased Services expense increased $45 million, or 7%, due in part to costs incurred by the School of Oceanography for research activities aboard the R/V Thompson, and to consulting fees associated with implementation of a new enterprise HR/payroll system. Depreciation expense increased by $28 million, or 10%, driven by several large capital additions that were placed into service during the year including renovations to Husky Stadium, new residence halls and apartments, and the new academic building on the UW Bothell campus. In 2013, the University s operating expenses increased by $210 million, or 5%, over Salaries expense increased $55 million, or 3%, reflecting a modest increase in staffing. Benefits expense increased by $14 million, or 2%, offset slightly by a reduction in the University s healthcare contribution rate during the year. Purchased services increased $45 million, or 8%, driven by a $20 million increase in consulting fees incurred by UWMC in support of IT projects, $12 million increase in expenses related to subcontracts (primarily research related) and $ 7 million increase in non-capitalizable expenses for pollution remediation. Depreciation/amortization expense increased $37 million, or 15%, driven by several large capital additions that were placed into service during the year. Operating Loss The University s operating loss increased to $470 million in 2014 from $338 million in The 2013 operating loss was a decrease from $389 million in State appropriations are shown as nonoperating revenue, pursuant to GASB standards. If state appropriations were classified as operating revenue, the operating loss would be as follows for 2014, 2013 and 2012, respectively: $208 million, $120 million, and $170 million. The University continues to rely on nonoperating revenues such as gift revenues and investment income distributions, in addition to state appropriations, to fund its operations. Operating Margin Moody s measures the net result of revenue and expense activity by including several nonoperating revenues in the margin. The 2014 operating margin decreased to 1.5% from 3.7% in Operating margin calculations include an estimated return on the University s investments rather than actual investment income. Therefore, variances in investment performance in a given year will not impact the operating margin. PERCENTAGE % Operating Margin 3 3.7% 2.1% % Moody s Public Universities (Aaa median 2013) 3 Operating loss, (including interest expense, operating appropriations, nonoperating federal grants, an assumed 5% spending rate on investments and nonpermanent endowment gifts), divided by operating revenues (less scholarship expenses, and including operating appropriations, nonoperating federal grants, an assumed 5% return on investments and nonpermanent endowment gifts). Excludes Northwest Hospital and Valley Medical Center. Unaudited see accompanying notes to basic financial statements UNIVERSITY OF WASHINGTON / 10

16 Unaudited see accompanying notes to basic financial statements FINANCIAL REPORT 2014 / 11

17 UNIVERSITY OF WASHINGTON STATEMENTS OF NET POSITION UNIVERSITY OF WASHINGTON DISCRETE COMPONENT UNITS 1 June 30, June 30, ASSETS AND DEFERRED OUTFLOWS OF RESOURCES CURRENT ASSETS: CASH AND CASH EQUIVALENTS (NOTE 2) $ ,128 $ ,206 $ ,027 $ ,349 INVESTMENTS, CURRENT PORTION (NOTE 6) 785, ,607 13,324 23,666 ACCOUNTS RECEIVABLE (NET OF ALLOWANCE OF $73,372 AND $77,553) (NOTE 5) 640, , ,596 98,073 INVENTORIES 28,361 31,658 9,397 9,466 OTHER CURRENT ASSETS 4,189 5,227 36,532 40,734 TOTAL CURRENT ASSETS 1,537,383 1,459, , ,288 NONCURRENT ASSETS: DEPOSIT WITH STATE OF WASHINGTON (NOTE 3) 57,383 58,392 INVESTMENTS, NET OF CURRENT PORTION (NOTE 6) 3,959,384 3,368,726 69,903 79,775 METROPOLITAN TRACT (NOTE 7) 112, ,461 STUDENT LOANS RECEIVABLE (NET OF ALLOWANCE OF $8,431 AND $8,158) (NOTE 4) 72,498 70,392 OTHER NONCURRENT ASSETS 114, ,203 83,581 56,694 CAPITAL ASSETS (NET OF ACCUMULATED DEPRECIATION OF $3,329,980 AND $3,111,454) (NOTE 8) 4,044,796 3,975, , ,947 TOTAL NONCURRENT ASSETS 8,360,823 7,708, , ,416 TOTAL ASSETS 9,898,206 9,167, , ,704 DEFERRED OUTFLOWS OF RESOURCES: UNAMORTIZED LOSS ON BOND REFUNDING 14,359 TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES $ 9,912,565 $ 9,167,181 $ 865,040 $ 872,704 LIABILITIES AND DEFERRED INFLOWS OF RESOURCES CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 163,212 $ 156,527 $ 26,399 $ 24,602 ACCRUED LIABILITIES 348, , ,293 98,760 COMMERCIAL PAPER (NOTE 11) 50,000 25,000 UNEARNED REVENUES 165, ,492 8,023 FUNDS HELD FOR OTHERS 34,975 30,206 LONG-TERM LIABILITIES, CURRENT PORTION (NOTES 9-11) 109,591 91,332 12,414 12,662 TOTAL CURRENT LIABILITIES 871, , , ,047 NONCURRENT LIABILITIES: U.S. GOVERNMENT GRANTS REFUNDABLE 52,426 49,555 LONG-TERM LIABILITIES, NET OF CURRENT PORTION (NOTES 9 11) 2,345,620 2,223, , ,175 TOTAL NONCURRENT LIABILITIES 2,398,046 2,272, , ,175 TOTAL LIABILITIES 3,270,016 3,002, , ,222 DEFERRED INFLOWS OF RESOURCES: PROPERTY TAXES 8,585 TOTAL LIABILITIES AND DEFERRED INFLOWS OF RESOURCES 3,270,016 3,002, , ,222 NET POSITION NET INVESTMENT IN CAPITAL ASSETS 2,018,077 2,038,495 84,800 93,222 RESTRICTED: NONEXPENDABLE 1,257,297 1,182,986 1,775 1,773 EXPENDABLE 1,628,532 1,344,643 8,511 8,537 UNRESTRICTED 1,738,643 1,598, , ,950 TOTAL NET POSITION 6,642,549 6,165, , ,482 TOTAL LIABILITIES, DEFERRED INFLOWS OF RESOURCES AND NET POSITION $ 9,912,565 $ 9,167,181 $ 865,040 $ 872,704 1 See Note 18 See accompanying notes to basic financial statements. Dollars in thousands UNIVERSITY OF WASHINGTON / 12

18 UNIVERSITY OF WASHINGTON STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION UNIVERSITY OF WASHINGTON DISCRETE COMPONENT UNITS 1 Year ended June 30, Year ended June 30, REVENUES OPERATING REVENUES: STUDENT TUITION AND FEES (NET OF SCHOLARSHIP ALLOWANCE OF $139,776 AND $135,354) $ ,796 $ ,053 $ 2014 $ 2013 PATIENT SERVICES (NET OF PROVISION FOR UNCOLLECTIBLE ACCOUNTS OF $16,487 AND $26,699) 1,206,918 1,162, , ,581 FEDERAL GRANTS AND CONTRACTS 1,020,052 1,057,829 STATE AND LOCAL GRANTS AND CONTRACTS 82,787 93,891 NONGOVERNMENTAL GRANTS AND CONTRACTS 172, ,998 SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 212, ,320 AUXILIARY ENTERPRISES: HOUSING AND FOOD SERVICES 102,239 91,133 SPORTS PROGRAMS (NET OF SCHOLARSHIP ALLOWANCE OF $6,745 AND $6,301) 55,098 47,481 OTHER AUXILIARY ENTERPRISES 103,227 45,861 OTHER MEDICAL-RELATED REVENUE 36,575 28,593 45,556 38,888 OTHER OPERATING REVENUE 83,035 90,372 TOTAL OPERATING REVENUES 3,913,971 3,782, , ,469 EXPENSES OPERATING EXPENSES (NOTE 12): SALARIES 2,026,646 1,894, , ,083 BENEFITS 661, ,338 98, ,389 SCHOLARSHIPS AND FELLOWSHIPS 138, ,897 UTILITIES 53,128 55,068 8,639 8,769 SUPPLIES AND MATERIALS 419, , , ,762 PURCHASED SERVICES 675, , , ,048 DEPRECIATION/AMORTIZATION 308, ,099 51,018 52,028 OTHER 101, ,737 18,468 19,930 TOTAL OPERATING EXPENSES 4,384,376 4,121, , ,009 OPERATING INCOME (LOSS) (470,405) (338,229) 9,210 (5,540) NONOPERATING REVENUES (EXPENSES) STATE APPROPRIATIONS 262, ,165 GIFTS 117, , INVESTMENT INCOME (NET OF INVESTMENT EXPENSE OF $9,511 AND $8,326) 480, ,241 7,390 7,519 INTEREST ON CAPITAL ASSET-RELATED DEBT (91,535) (57,200) (26,731) (22,620) PELL GRANT REVENUE 47,370 45,655 PROPERTY TAX REVENUE 16,342 16,254 OTHER NONOPERATING REVENUES (EXPENSES) 42,816 (19,780) (9,038) (2,937) NET NONOPERATING REVENUES (EXPENSES) 858, ,904 (11,925) (1,560) INCOME (LOSS) BEFORE OTHER REVENUES 388, ,675 (2,715) (7,100) CAPITAL APPROPRIATIONS 7,693 47,123 CAPITAL GRANTS, GIFTS AND OTHER 26,156 26, ,340 GIFTS TO PERMANENT ENDOWMENTS 55,541 57,882 2 TOTAL OTHER REVENUES 89, , ,340 INCREASE (DECREASE) IN NET POSITION 477, ,443 (2,687) 1,240 NET POSITION NET POSITION BEGINNING OF YEAR 6,165,051 5,741, , ,242 NET POSITION END OF YEAR $ 6,642,549 $ 6,165,051 $ 313,795 $ 316,482 1 See Note 18 See accompanying notes to basic financial statements. Dollars in thousands FINANCIAL REPORT 2014 / 13

19 UNIVERSITY OF WASHINGTON STATEMENTS OF CASH FLOWS UNIVERSITY OF WASHINGTON Year Ended June 30, CASH FLOWS FROM OPERATING ACTIVITIES STUDENT TUITION AND FEES $ ,239 $ ,131 PATIENT SERVICES 1,194,212 1,148,870 GRANTS AND CONTRACTS 1,277,865 1,276,506 PAYMENTS TO SUPPLIERS (410,053) (395,116) PAYMENTS FOR UTILITIES (53,401) (55,051) PURCHASED SERVICES (671,535) (630,170) OTHER OPERATING DISBURSEMENTS (103,259) (114,101) PAYMENTS TO EMPLOYEES (2,020,124) (1,892,338) PAYMENTS FOR BENEFITS (593,696) (543,668) PAYMENTS FOR SCHOLARSHIPS AND FELLOWSHIPS (138,309) (140,897) LOANS ISSUED TO STUDENTS (22,846) (24,716) COLLECTION OF LOANS TO STUDENTS 23,609 23,520 OTHER MEDICAL CENTER RECEIPTS 36,575 28,593 AUXILIARY ENTERPRISE RECEIPTS 275, ,732 SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 208, ,927 RECEIPTS FROM OUTSIDE AFFILIATED AGENCIES 696, ,350 DISBURSEMENTS TO OUTSIDE AFFILIATED AGENCIES (690,165) (688,722) OTHER RECEIPTS 92,984 78,870 NET CASH USED BY OPERATING ACTIVITIES (64,337) (115,280) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES STATE APPROPRIATIONS 262, ,068 GIFTS AND GRANTS FOR OTHER THAN CAPITAL PURPOSES 47,370 45,655 PRIVATE GIFTS 96,579 90,323 PERMANENT ENDOWMENT RECEIPTS 55,541 57,882 DIRECT LENDING RECEIPTS 243, ,350 DIRECT LENDING DISBURSEMENTS (244,254) (238,113) OTHER 161 (19,571) NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES 461, ,594 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES PROCEEDS FROM CAPITAL DEBT 213, ,385 STATE CAPITAL APPROPRIATIONS 5,848 47,504 CAPITAL GRANTS AND GIFTS RECEIVED 25,678 24,818 ACQUISITION AND CONSTRUCTION OF CAPITAL ASSETS (365,724) (624,457) PRINCIPAL PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES (103,012) (142,933) INTEREST PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES (99,785) (67,939) OTHER 4,008 (7,207) NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (319,011) (331,829) UNIVERSITY OF WASHINGTON / 14

20 UNIVERSITY OF WASHINGTON Year Ended June 30, CASH FLOWS FROM INVESTING ACTIVITIES PROCEEDS FROM SALES OF INVESTMENTS 4,667,652 6,408,348 DISBURSEMENTS FOR PURCHASES OF INVESTMENTS (4,815,180) (6,417,393) INVESTMENT INCOME 70,549 70,608 NET CASH (USED BY) PROVIDED BY INVESTING ACTIVITIES (76,979) 61,563 NET INCREASE IN CASH AND CASH EQUIVALENTS ,048 CASH AND CASH EQUIVALENTS-BEGINNING OF THE YEAR 78,206 50,158 CASH AND CASH EQUIVALENTS-END OF THE YEAR $ 79,128 $ 78,206 RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES OPERATING LOSS $ (470,405) $ (338,229) ADJUSTMENTS TO RECONCILE OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES: DEPRECIATION/AMORTIZATION EXPENSE 308, ,099 CHANGES IN ASSETS AND LIABILITIES: RECEIVABLES (13,734) (78,751) INVENTORIES 3, OTHER ASSETS (6,401) (10,872) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 21,256 (1,098) UNEARNED REVENUE 38,434 (27,466) OTHER LONG-TERM LIABILITIES 54,261 62,218 U.S. GOVERNMENTAL GRANTS REFUNDABLE 2, LOANS TO STUDENTS (2,106) (1,353) NET CASH USED BY OPERATING ACTIVITIES $ (64,337) $ (115,280) NONCASH INVESTING, CAPITAL AND FINANCING ACTIVITIES STOCK GIFTS $ 20,492 $ 11,500 INCREASE IN INTEREST IN SEATTLE CANCER CARE ALLIANCE 12,239 7,508 NET UNREALIZED GAINS 339, ,376 TOTAL NONCASH INVESTING, CAPITAL AND FINANCING ACTIVITIES $ 371,886 $ 210,384 See accompanying notes to basic financial statements. Dollars in thousands FINANCIAL REPORT 2014 / 15

21 NOTES TO FINANCIAL STATEMENTS NOTE 1: Summary of Significant Accounting Policies FINANCIAL REPORTING ENTITY The University of Washington (University) an agency of the state of Washington, is governed by a 10-member Board of Regents appointed by the governor and confirmed by the state senate. The financial statements include the individual schools, colleges and departments of the University, the University of Washington Medical Center (UWMC), Portage Bay Insurance (a wholly-owned subsidiary of the University) and certain affiliated operations determined to be a part of the University s financial reporting entity. Affiliated organizations are evaluated for inclusion in the reporting entity as component units based on the significance of their relationship with the University. Harborview Medical Center (HMC), a component unit of King County, Washington, is a related party to the University, but is not reflected as part of the financial reporting entity (Note 13). Component units are legally separate organizations for which the University is financially accountable. These entities may be reported in the financial statements of the primary government in one of two ways: the component units amounts may be blended with the amounts reported by the primary government, or they may be shown in a separate column, depending on the application of the criteria of Governmental Accounting Standards Board (GASB) Statement No. 61, The Financial Reporting Entity: Omnibus. All component units of the University meet the criteria for blending except Northwest Hospital & Medical Center and Valley Medical Center. They are reported discretely, since they have separate boards of directors and they do not provide services exclusively to the University. BLENDED COMPONENT UNITS The following entities are presented as blended component units because they provide service exclusively or almost exclusively to the University. Financial information for these affiliated organizations is available from their respective administrative offices. The Association of University Physicians dba UW Physicians (UWP) was established as a tax-exempt entity for the exclusive benefit of the University of Washington School of Medicine (UWSOM). UWP employs UWSOM faculty and bills and collects for their clinical services as an agent for UWSOM. UWP had operating revenues of $174,283,000 and $173,566,000 in 2014 and 2013, respectively. UW Medicine Neighborhood Clinics (Neighborhood Clinics) was established as a tax-exempt entity for the benefit of UWSOM, UWP and its affiliated medical centers, HMC and UWMC, exclusively for charitable, scientific and educational purposes. The Neighborhood Clinics were organized to coordinate and develop patient care in a community clinical setting. They enhance the academic environment of UWSOM by providing additional sites of primary care practice and training for faculty, residents and students. Neighborhood Clinics had operating revenues of $14,596,000 and $14,614,000 in 2014 and 2013, respectively. Real estate financing entities The entities listed below are nonprofit corporations that were formed to acquire, construct or renovate certain real properties for the benefit of the University in fulfilling its educational, medical or scientific research missions. These entities issue tax-exempt and taxable bonds to finance these activities. TSB Properties Washington Biomedical Research Properties I Washington Biomedical Research Properties II Washington Biomedical Research Facilities 3 These entities collectively have net capital assets of $309,075,000 and $323,144,000 in 2014 and 2013, respectively. They collectively have long-term debt of $314,400,000 and $333,450,000 in 2014 and 2013, respectively. These amounts are reflected in the University s financial statements. DISCRETELY PRESENTED COMPONENT UNITS Northwest Hospital UW Medicine and Northwest Hospital & Medical Center (Northwest Hospital), a 281-bed full-service acute care hospital, entered into an affiliation agreement effective January 1, The University is the sole corporate member of Northwest Hospital. The audited financial statements of Northwest Hospital are available by contacting Northwest Hospital & Medical Center at 1550 N. 115th Street, Seattle, Washington , Mailstop X-112. Valley Medical Center UW Medicine and Public Hospital District No. 1 of King County, a Washington public hospital district dba Valley Medical Center, entered into a strategic alliance, effective July 1, Valley Medical Center owns and operates a 321-bed full-service acute care hospital and 45 clinics located throughout southeast King County. The audited financial statements of Valley Medical Center are available by contacting Valley Medical Center at 400 S. 43rd Street, Renton, Washington or online at the following address: financial-information/. JOINT VENTURES The University, together with Seattle Children s Hospital and Fred Hutchinson Cancer Research Center established the Seattle Cancer Care Alliance (SCCA). The SCCA integrates the cancer research, teaching and clinical cancer programs of all three institutions to provide state-of-the-art cancer care. Each member of the SCCA has a one-third interest. The University accounts for its interest in SCCA under the equity method and has recorded $101,385,000 and $89,146,000 in Other Assets, together with $12,239,000 and $7,508,000 in Investment Income, for its share of the joint venture in 2014 and 2013, respectively. The University and Seattle Children s Hospital established Children s University Medical Group (CUMG) to assist the organizations in carrying out their pediatric patient care, charitable, educational, UNIVERSITY OF WASHINGTON / 16

22 and scientific missions. CUMG employs UWSOM faculty physicians, and bills and collects for their services as an agent for UWSOM. The University records revenue from CUMG based on the income distribution plan effective December 31, The University s patient services receivable (Note 5) includes amounts due from CUMG of $20,818,000 and $17,937,000 in 2014 and 2013, respectively. CHANGES IN REPORTING ENTITY In fiscal year 2013, the University paid the remaining outstanding principal balance on the Twenty-Fifth Avenue Properties Student Housing Revenue Bonds, 2002, and title to the property known as Nordheim Court was passed to the University. The entity that issued the leased-backed bonds, Twenty- Fifth Avenue Properties, was dissolved and is no longer a component unit of the University. BASIS OF ACCOUNTING The financial statements of the University have been prepared in accordance with GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The University is reporting as a special-purpose government engaged in business-type activities (BTA). In accordance with BTA reporting, the University presents management s discussion and analysis, statements of net position, statements of revenues, expenses and changes in net position, statements of cash flows and notes to the financial statements. The financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All intra-agency transactions have been eliminated. The University reports capital assets net of accumulated depreciation/amortization (as applicable), and reports depreciation/amortization expense in the Statements of Revenues, Expenses and Changes in Net Position. On July 1, 2012, the University adopted GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. The objective of this Statement is to incorporate into the GASB s authoritative literature certain accounting and financial reporting guidance contained in accounting pronouncements of the Financial Accounting Standards Board (FASB) and its predecessors, which was issued on or before November 30, 1989 and which does not conflict with or contradict existing GASB pronouncements. Implementation of this Statement resulted in a minor footnote revision. On July 1, 2012, the University adopted GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. This Statement provides guidance for accounting and financial reporting of deferred outflows of resources and deferred inflows of resources. GASB Concepts Statement No. 4, Elements of Financial Statements, introduced and defined these elements as a consumption of net position by the government that is applicable to a future reporting period, and an acquisition of net position by the government that is applicable to a future reporting period, respectively. Previous financial reporting standards did not include guidance for reporting these financial statement elements, which are distinct from assets and liabilities. This Statement amended the net asset reporting requirements of Statement No. 34 and other pronouncements by incorporating deferred outflows of resources and deferred inflows of resources into the definitions of the required components of the residual measure and by renaming that measure as Net Position, rather than Net Assets. The impact to the University from implementation of this Statement is limited to renaming the Balance Sheets as Statements of Net Position, and renaming the title of Net Assets to Net Position on the Statements of Net Position and the Statements of Revenues, Expenses and Changes in Net Position. On July 1, 2013, the University adopted GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as expenses or revenues, certain items that were previously reported as assets and liabilities. The impact to the University from implementation of this Statement is that all prior bond issuance costs were written off in the Statements of Revenues, Expenses and Changes in Net Position as Interest on Capital Asset-Related Debt in the fiscal year ending June 30, In addition, all prior losses on refunding of bonds were reported as Deferred Outflows of Resources, and property tax revenues related to Valley Medical Center were reported as Deferred Inflows of Resources, as of June 30, On July 1, 2013, the University adopted GASB Statement No. 66, Technical Corrections 2012 an amendment of GASB Statements No. 10 and No. 62. This Statement amends previously issued GASB statements to resolve conflicting guidance. There was no impact to the financial statements of the University as a result of implementing this Statement. On July 1, 2013, the University adopted GASB Statement No. 67, Financial Reporting for Pension Plans. This Statement replaces the requirements of Statements No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and No. 50, Pension Disclosures, as they relate to pension plans that are administered through trusts that meet certain criteria. Implementation of this Statement required the University to reflect a minor additional disclosure related to the University of FINANCIAL REPORT 2014 / 17

23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Washington Retirement Plan, a defined contribution pension plan. The requirements of Statements No. 25 and No. 50 remain applicable to pension plans that are not administered through trusts, such as the University of Washington Supplemental Retirement Plan (Note 15). On July 1, 2013, the University adopted GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. This Statement requires a government that extends a nonexchange financial guarantee to recognize a liability when qualitative factors and historical data, if any, indicate that it is more likely than not that the government will be required to make a payment on the guarantee. This Statement also specifies the information required to be disclosed by governments that extend or receive nonexchange financial guarantees. The University has not extended or received any nonexchange financial guarantees as of the years ended June 30, 2014 or 2013, therefore there was no impact to the financial statements of the University as a result of implementing this Statement. ACCOUNTING STANDARDS IMPACTING THE FUTURE In June 2012, the GASB approved Statement No. 68, Accounting and Financial Reporting for Pensions, which will take effect in the fiscal year ending June 30, This Statement requires governments providing defined benefit pensions to their employees to recognize their long-term obligation for pension benefits as a liability for the first time, along with the associated assets which have been set aside to fund the plan. Since the University participates in several cost sharing pension plans which are administered by the state of Washington Department of Retirement Systems (DRS), this statement will require the University to recognize its proportionate share of the statewide net pension liability for each of the plans in which it participates. The Statement also eliminates the method of amortizing the liability balances over several years, and instead requires full recognition of the net liability upon implementation. The requirement of GASB Statement No. 68 to record a proportionate share of retirement plan unfunded pension liabilities may negatively impact the University s future unrestricted net position. The University is currently analyzing the impact of this Statement. Information regarding the funding status of the DRS retirement plans can be found in their financial report (Note 15). In January 2013, the GASB issued Statement No. 69, Government Combinations and Disposals of Government Operations. This Statement requires disclosures to be made about government combinations and disposals of government operations, in order to enable financial statement users to evaluate the nature and financial effects of those transactions. The requirements of this Statement are effective for financial reporting periods beginning in fiscal year 2015, and will be applied on a prospective basis when applicable. In November 2013, the GASB issued Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, an amendment of GASB Statement No. 68, Accounting and Financial Reporting for Pensions. The purpose of this Statement is to address application of the transition provisions of GASB Statement No. 68 and clarify guidance regarding contributions made by a state or local government employer, or nonemployer contributing entity, to a defined benefit pension plan after the measurement date of the government s beginning net pension liability. The University is currently analyzing the impact of this statement. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles involves management estimates that affect the reported amounts of assets, liabilities, deferrals, revenues and expenses during the reporting period. Actual results could differ from those estimates; however, in each case, the University believes that allowances, reserves and estimates of expected liabilities are adequate. The University estimates the pollution remediation liability by reviewing the current status of known polluted sites and developing estimates of cleanup costs. These estimates are subject to change due to improvements in technology, inflation, changes in the scope of work, and the pursuit of reimbursement from other responsible parties. Allowances (Notes 4 and 5) are estimates based on the historical experience of the University and current economic circumstances with respect to the collectability of accounts and loans receivable. The liability and expense related to the University of Washington Supplemental Retirement Plan (Note 15) are based on an actuarial valuation prepared by an external actuary. The results of an actuarial valuation are estimates based on historical data, actuarial assumptions, and the demographics of the employee population. The self-insurance reserve (Note 16) is estimated through an externally prepared actuarial calculation using individual casebasis valuations and statistical analyses. Considerable variability is inherent in such estimates. OTHER ACCOUNTING POLICIES Investments. Investments are generally carried at fair value. The fair value of all debt and equity securities with a readily determinable fair value is based on quotations from major securities exchanges. Alternative investments, which are not readily marketable, are carried at the estimated fair values provided by the investment managers. The University reviews and evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. Those estimated fair values may differ significantly from the values that would have been used had a ready market for these securities existed. Investments under long-term strategies are considered noncurrent. Short-term investments consist primarily of cash equivalents and fixed income vehicles which management has identified as available to meet the day-to-day obligations of the University. Inventories. Inventories are carried at the lower of cost or market value. Consumable inventories, consisting of expendable materials and supplies, are generally valued using the weighted-average method. Merchandise inventories are generally valued using the first-in, first-out method. UNIVERSITY OF WASHINGTON > 18

24 Capital Assets. Land, buildings, equipment, library books and intangibles are stated at cost or, if acquired by gift, at fair market value at the date of the gift. Additions, replacements, major repairs and renovations are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 50 years for building components, 20 to 50 years for infrastructure and land improvements, 5 to 7 years for equipment, 15 years for library books, and 3 to 15 years for intangibles. Interest incurred on capital asset-related debt was $103,065,000 and $76,371,000 during 2014 and 2013, respectively. Of those costs, the University capitalized $11,530,000 and $19,171,000 during 2014 and 2013, respectively. Unearned Revenues. Unearned revenues occur when funds have been collected in advance of when the associated goods or services have been provided, such as advance ticket sales, summer quarter tuition and unspent cash advances on certain grants. Split-Interest Agreements. Under these agreements, donors/beneficiaries receive income for their lifetime or for a stated term, with the University receiving the remaining principal. The University records an asset related to these agreements at fair market value at year-end. The University also records a liability related to the split-interest agreements equal to the present value of expected future distributions; the discount rates applied range from 2.5% to 8.0%. Compensated Absences. University employees accrue annual leave at rates based on length of service, and for sick leave at the rate of one day per month. Sick leave balances, which are unlimited, can be converted to monetary compensation annually at 25% of the employees normal compensation rate for any balance that exceeds 480 hours, or for any balance upon retirement or death. Annual leave accrued at June 30, 2014 and 2013 was $86,780,000 and $86,902,000, respectively, and is included in Accrued Liabilities. Sick leave accrued as of June 30, 2014 and 2013 was $36,174,000 and $35,878,000, respectively, and is included in Long-Term Liabilities. Scholarship Allowances. Tuition and Fees are reported net of scholarship allowances that are applied to students accounts from external funds that have already been recognized as revenue by the University. Student aid paid directly to students is reported as scholarships and fellowships expense. Net Patient Services Revenue. Patient services revenue is recorded at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Revenue related to charity care provided to patients is excluded from net patient services revenue. Third-party payor agreements with Medicare and Medicaid that provide for payments at amounts different from established rates are part of contractual adjustments to net patient services revenue. Medicare reimbursements are based on a tentative rate, with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary. The estimated final settlements for open years are based on preliminary cost findings after giving consideration to interim payments that have been received on behalf of patients covered under these programs. For more information about UWMC operations and financial results, see their audited financial statements which are contained in the latest Bondholders Report at investor-relations. Charity Care. Based on established rates, the charges for patient services forgone as a result of charity care during the years ended were $66,632,000 and $81,347,000, respectively. The cost of charity care is estimated based on the ratio of the cost of providing care to the value of the charges forgone. Applying this ratio results in an estimated cost of charity care and uncompensated care of $25,782,000 and $32,000,000 in fiscal years 2014 and 2013, respectively. State Appropriations. The state of Washington appropriates funds to the University on both annual and biennial bases. These revenues are reported as nonoperating revenues in the Statements of Revenues, Expenses and Changes in Net Position. Operating Activities. The University s policy for reporting operating activities in the Statements of Revenues, Expenses and Changes in Net Position is to include activities that generally result from exchange transactions. Examples of exchange transactions are payments received for tuition, patient services or grants under which services are performed, as well as payments made for the delivery of goods or services. Certain other significant revenue streams used for operations, such as state appropriations, Pell grants, gifts and investment income are recorded as nonoperating revenues, as prescribed by GASB Statement No. 35. Net Position. The University s net position is classified as follows: Net investment in capital assets: The University s investments in capital assets, less accumulated depreciation/amortization, net of outstanding debt obligations related to capital assets; Restricted net position nonexpendable: Net position subject to externally-imposed requirements that it be maintained permanently by the University, including permanent endowment funds and annuity and life income trusts; Restricted net position expendable: Net position that the University is obligated to spend in accordance with restrictions imposed by external parties, generally scholarships, research and department uses; Unrestricted net position: Net position not subject to externally imposed restrictions and which may be designated for specific purposes by management, or the Board of Regents. Tax Exemption. The University, as an agency of the state of Washington, is not subject to federal income tax pursuant to Section 115 of the Internal Revenue Code, except for tax on unrelated business income. FINANCIAL REPORT 2014 / 19

25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2: Cash and Cash Equivalents Cash includes cash on hand, petty cash and bank deposits. Most cash, except for cash held at the University and cash held in foreign banks, is covered by the Federal Deposit Insurance Corporation (FDIC), or if greater than FDIC limits, by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). At, bank balances of $83,311,000 and $89,742,000, respectively, were either insured by the FDIC or collateralized under the PDPC. NOTE 3: Deposit with State of Washington State law requires the University to deposit certain funds with the state treasurer, who holds and invests the funds. The deposits include amounts held for the University s permanent land grant funds, the University of Washington building fee collected from students and certain general obligation bond reserve funds. The fair value of these funds approximates the carrying value. NOTE 4: Student Loans Receivable Net student loans of $72,498,000 and $70,392,000 at, respectively, consist of $57,870,000 and $54,943,000 from federal programs and $14,628,000 and $15,449,000 from University programs at June 30, 2014 and 2013 respectively. Interest income from student loans for the years ended June 30, 2014 and 2013 was $1,427,000 and $1,331,000, respectively. These unsecured loans are made primarily to students who reside in the state of Washington. NOTE 5: Accounts Receivable The major components of accounts receivable as of were: (Dollars in thousands) PATIENT SERVICES, NET $ 296,016 $ 285,378 GRANTS AND CONTRACTS 186, ,134 SALES AND SERVICES 27,263 23,444 TUITION 14,751 15,004 DUE FROM OTHER AGENCIES 84,241 42,649 ROYALTIES 27,017 25,201 INVESTMENTS 45,053 37,308 STATE APPROPRIATIONS 6,502 5,364 OTHER 26,584 28,423 SUBTOTAL 713, ,905 LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS (73,372) (77,553) TOTAL $ 640,270 $ 574,352 NOTE 6: Investments INVESTMENTS - GENERAL The Board of Regents of the University of Washington is responsible for the management of the University s investments. The Board of Regents establishes investment policy, which is carried out by the Chief Investment Officer. The University of Washington Investment Committee, TABLE 1 UNIVERSITY INVESTMENTS (Dollars in thousands) comprised of board members and investment professionals, advises on matters relating to the management of the University s investment portfolios. The composition of the carrying amounts of investments by type at is listed in Table 1. Carrying Value Investment Type CASH EQUIVALENTS $ 16,957 $ 256,781 FIXED INCOME 1,972,553 1,655,711 EQUITY 1,672,262 1,287,084 NON-MARKETABLE ALTERNATIVES* 349, ,632 ABSOLUTE RETURN* 509, ,416 REAL ASSETS* 219, ,792 MISCELLANEOUS 4,724 5,917 TOTAL INVESTMENTS $ 4,744,819 $ 4,138,333 * Investment type includes private and other illiquid investments held in the Consolidated Endowment Fund INVESTMENT POOLS The University combines most short-term cash balances into the Invested Funds Pool. At June 30, 2014, the Invested Funds Pool totaled $1,606,152,000 compared to $1,564,368,000 at June 30, The Invested Funds Pool also owns units in the Consolidated Endowment Fund (CEF) valued at $668,863,000 on June 30, 2014 and $468,187,000 on June 30, By University policy, departments with qualifying funds in the Invested Funds Pool receive distributions based on their average balances and on the type of balance. Campus depositors received 2% in fiscal years 2014 and Endowment operating and gift accounts received 3% in both fiscal years 2014 and 2013 with the distributions directed to the University. The difference between the actual earnings of the Invested Funds Pool and the calculated distributions is used to support activities benefiting all University departments. The majority of the endowed funds are invested in a pooled fund called the CEF. Individual endowments purchase units in the pool on the basis of a per-unit valuation of the CEF at fair value on the last business day of the calendar quarter. Income is distributed based on the number of units held. RCW of the Washington State Code and the Uniform Prudent Management of Institutional Funds Act allow for total return expenditure under comprehensive prudent standards. Under the CEF spending policy approved by the Board of Regents, quarterly distributions to programs are based on an annual percentage rate of 4%, applied to the five-year rolling average of the CEF s market valuation. Additionally, the policy allows for an administrative fee of 1% supporting campus-wide fundraising and stewardship activities (0.80%) and offsetting the internal cost of managing endowment assets (0.20%). This policy was effective with the December 2010 quarterly distributions, with the five-year averaging period implemented incrementally. The University records its permanent endowments at the lower of original gift value or current market value in the Restricted Nonexpendable Net Position category. Of the endowments that are recorded at current market value, the net deficiency from the original gift value is $4,676,000 and $18,297,000 at June 30, 2014 and 2013, respectively. Funds in irrevocable trusts managed by trustees other than the University are not UNIVERSITY OF WASHINGTON / 20

26 reported in the financial statements. The fair value of these funds was $111,831,000 at June 30, 2014 compared to $49,575,000 at June 30, The increase in the fair value is largely due to a $58,000,000 estate gift received in fiscal year Income received from these trusts, which is included in Investment Income, was $2,297,000 for the year ended June 30, 2014 and $2,224,000 for the year ended June 30, Net appreciation (depreciation) in the fair value of investments includes both realized and unrealized gains and losses on investments. The University realized net gains of $58,702,000 and $72,750,000 in 2014 and 2013, respectively, from the sale of investments. The calculation of realized gains and losses is independent of the net appreciation of the fair value of investments. Realized gains and losses on investments that have been held in more than one fiscal year and are sold in the current year include the net appreciation of these investments reported in the prior year(s). The net appreciation in the fair value of investments during the years ended was $397,857,000 and $264,126,000, respectively. FUNDING COMMITMENTS The University enters into contracts with investment managers to fund alternative investments. As of, the University had outstanding commitments to fund alternative investments of $262,852,000 and $191,669,000, respectively. These commitments are expected to be called over a multi-year time frame. The University believes it has adequate liquidity and funding sources to meet these obligations. DERIVATIVES The University s investment policies allow investing in various derivative instruments, including futures, swaps and forwards, to manage exposures within or across the portfolio and to improve the portfolio s risk/ return profile. Futures are financial contracts obligating the buyer to purchase an asset at a predetermined future date and price. Total return swaps involve commitments to pay interest in exchange for a market-linked return, both based on notional amounts. Derivative instruments are recorded on the contract date and are carried at fair value using listed price quotations or amounts that approximate fair value. The fair value balances and notional amounts of investment derivative instruments outstanding at June 30, 2014 and 2013, categorized by type, are as follows: TABLE 2 INVESTMENT DERIVATIVES (Dollars in thousands) Notional Amount Fair Value as of June 30 Changes in Fair Value DESCRIPTION ASSET CLASSIFICATION INCOME CLASSIFICATION FUTURES CONTRACTS $18,049 $34,462 INVESTMENTS $18,815 $34,278 INVESTMENT INCOME $766 $184 Credit exposure represents exposure to counterparties relating to financial instruments where gains exceed collateral held by the University or losses are less than the collateral posted by the University. There was no credit exposure as of June 30, 2014 or No derivative instruments have been reclassified from a hedging instrument to an investment instrument. Details on foreign currency derivatives are disclosed under Foreign Exchange Risk. INTEREST RATE RISK Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of fixed income securities. The University manages interest rate risk through its investment policies and the investment guidelines established with each manager. Each fixed-income manager is assigned a maximum boundary for duration as compared to the manager s relevant benchmark index. The goal is to allow ample freedom for the manager to perform, while controlling the interest rate risk in the portfolio. Effective duration is a commonly used measure of interest rate risk. The longer the duration, the more sensitive the portfolio is to changes in interest rates. The weighted average effective duration of the University s fixed income portfolio was 1.91 and 2.95 years at, respectively. CREDIT RISK Fixed income securities are subject to credit risk, which is the risk that the issuer or other counterparty to a financial instrument will not fulfill its obligations or that negative perceptions of the issuer s ability to make these payments will cause prices to decline. Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The University Investment Policies limit fixed income exposure to investment grade assets. The Investment Policy for the Invested Funds cash pool requires each manager to maintain an average quality rating of AA as issued by a nationally recognized rating organization. The Invested Funds liquidity pool requires each manager to maintain an average quality rating of A and to hold 25% of their portfolios in government and government agency issues. The Investment Policy for the CEF reflects its long-term nature by specifying average quality rating levels by individual manager, but still restricting investment to investment grade credits. FINANCIAL REPORT 2014 / 21

27 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Duration and credit risk figures at exclude $49,348,000 and $53,541,000, respectively, of fixed income securities held outside the CEF and the Invested Funds Pool. These amounts make up 2.48% and 2.80%, respectively, of the University s fixed income investments (including cash equivalents), and are not included in the duration figures detailed in Table 3. The composition of the fixed income securities at June 30, 2014 and 2013, along with credit quality and effective duration measures is summarized as follows: TABLE 3 FIXED INCOME: CREDIT QUALITY AND EFFECTIVE DURATION (Dollars in thousands) 2014 Investments U.S. Government Investment Grade* Non-Investment Grade Not Rated Total Duration (in years) U.S. TREASURIES $ 877,812 $ $ $ $ 877, U.S. GOVERNMENT AGENCY 597, , MORTGAGE BACKED 103,105 93, , ASSET BACKED 178,075 8,495 1, , CORPORATE AND OTHER 79, , TOTAL $ 1,475,573 $ 360,375 $ 102,933 $ 1,281 $ 1,940, Investments U.S. Government Investment Grade* Non-Investment Grade Not Rated Total Duration (in years) U.S. TREASURIES $ 730,492 $ $ $ $ 730, U.S. GOVERNMENT AGENCY 661, , MORTGAGE BACKED 98,779 94,196 9, , ASSET BACKED 164,394 9,743 3, , CORPORATE AND OTHER 86, , TOTAL $ 1,391,651 $ 349,758 $ 103,939 $ 13,603 $ 1,858, * Investment Grade securities are those that are rated BBB and higher by Standard and Poor s or Baa and higher by Moody s FOREIGN EXCHANGE RISK Foreign exchange risk is the risk that investments denominated in foreign currencies may lose value due to adverse fluctuations in the value of the U.S. dollar relative to foreign currencies. The University s investment policies permit investments in international equity and other asset classes, which can include foreign currency exposure. The University also enters into foreign currency forward contracts, futures contracts, and options to manage the foreign currency exposure. The University held non-u.s. denominated securities at of $1,029,318,000 and $771,070,000, respectively. TABLE 4 INVESTMENTS DENOMINATED IN FOREIGN CURRENCY (Dollars in thousands) June 30, 2014 June 30, 2013 EURO (EUR) $ 156,509 $ 114,213 CHINESE RENMINBI (RMB) 126,848 73,109 INDIAN RUPEE (INR) 100,451 65,686 JAPANESE YEN (JPY) 65,017 45,735 BRAZILIAN REAL (BRL) 56,611 47,956 RUSSIAN RUBLE (RUB) 56,517 47,302 BRITISH POUND (GBP) 54,281 51,193 HONG KONG DOLLAR (HKD) 50,663 24,285 SOUTH KOREAN WON (KRW) 49,150 29,477 CANADIAN DOLLAR (CAD) 41,888 27,109 SWISS FRANC (CHF) 39,900 36,888 TAIWANESE DOLLAR (TWD) 30,894 23,796 PHILIPPINE PESO (PHP) 18,974 22,737 INDONESIA RUPIAH (IDR) 14,732 19,301 REMAINING CURRENCIES 166, ,283 TOTAL $ 1,029,318 $ 771,070 UNIVERSITY OF WASHINGTON / 22

28 NOTE 7: Metropolitan Tract The Metropolitan Tract, located in downtown Seattle, comprises approximately 11 acres of developed property including office space, retail space, parking and a luxury hotel. This land was the original site of the University from 1861 until 1895 when the University moved to its present location. Since the early 1900s, the Metropolitan Tract has been leased by the University to entities responsible for developing and operating the property. On July 18, 1953, the Board of Regents of the University and the entity now known as Unico Properties, LLC entered into a lease agreement for office, retail and parking facilities which will expire in November On January 19, 1980, the Board of Regents of the University entered into a lease with the Urban/Four Seasons Hotel Venture for the Olympic Hotel property, which will expire in The hotel was operated as the Four Seasons Olympic Hotel until July 31, On August 1, 2003, the remaining lease term was assigned to LHCS Hotel Holding (2002) LLC. The hotel was renamed the Fairmont Olympic Hotel and is now managed by Fairmont Hotels & Resorts. The balances as of represent operating assets, net of liabilities, and land, buildings and improvements stated at appraised value as of November 1, The balances also include subsequent capital additions and improvements at cost, less retirements and accumulated depreciation of $155,342,000 and $146,350,000, respectively, and are net of the outstanding balance of the associated commercial paper or line of credit. In June 2014, the Metropolitan Tract credit line balance of $8,500,000 was refinanced through the University s commercial paper program (Note 11). On September 20, 2013, the University exercised its option to terminate its lease with Unico for the Cobb Building, effective November 1, On October 28, 2014, the University issued $34,000,000 in short-term commercial paper, to buy out the leasehold of the Cobb Building and take possession of certain leasehold improvements. The University has entered into an agreement with Wright Runstad & Company to operate the Rainier Tower and Rainier Square commencing November 1, In addition, Wright Runstad will undertake pre-development activities relating to the redevelopment of Rainier Square. The University has plans to ground lease the property to Wright Runstad if and when certain development milestones are met. On November 1, 2014, the University selected Unico Properties, LLC to manage the remaining properties in the Metropolitan Tract. NOTE 8: Capital Assets Capital asset activity for the two-year period ended June 30, 2014 is summarized as follows: (Dollars in thousands) Balance at June 30, 2012 Additions/ Transfers Retirements Balance at June 30, 2013 Additions/ Transfers Retirements Balance at June 30, 2014 LAND $ 117,614 $ 9,793 $ 2,019 $ 125,388 $ 1,407 $ $ 126,795 INFRASTRUCTURE 184,027 9, , ,002 BUILDINGS 3,966, ,071 14,510 4,687, ,650 21,914 5,244,985 FURNITURE, FIXTURES AND EQUIPMENT 1,153, ,700 69,633 1,204, ,865 82,223 1,223,811 LIBRARY MATERIALS 304,768 12,481 1, ,604 11,767 1, ,663 CAPITALIZED COLLECTIONS 5,751 1,134 6, ,093 INTANGIBLE ASSETS 67,444 5,663 73,107 32, ,319 CONSTRUCTION IN PROGRESS 720,928 (253,342) 467,586 (341,016) 4, ,696 INTANGIBLES IN PROCESS 6,528 6,893 13,421 11,991 25,412 TOTAL 6,526, ,368 87,807 7,087, , ,867 7,374,776 LESS ACCUMULATED DEPRECIATION/ AMORTIZATION: INFRASTRUCTURE 86,287 4,566 90,853 4,498 95,351 BUILDINGS 1,634, ,299 9,137 1,782, ,424 11,261 1,946,659 FURNITURE, FIXTURES AND EQUIPMENT 925,175 93,621 66, , ,910 77, ,794 LIBRARY MATERIALS 215,917 14,861 1, ,591 10,749 1, ,087 INTANGIBLE ASSETS 46,728 9,752 56,480 9,609 66,089 TOTAL ACCUMULATED 2,908, ,099 77,086 3,111, ,190 89,664 3,329,980 DEPRECIATION/AMORTIZATION CAPITAL ASSETS, NET $ 3,618,409 $ 368,269 $ 10,721 $ 3,975,957 $ 90,042 $ 21,203 $ 4,044,796 FINANCIAL REPORT 2014 / 23

29 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9: Long-Term Liabilities UNIVERSITY OF WASHINGTON Long-term liability activity for the two-year period ended June 30, 2014 is summarized as follows: (Dollars in thousands) Balance at June 30, 2012 Additions/ Transfers Reductions Balance at June 30, 2013 Additions/ Transfers Reductions Balance at June 30, 2014 Current Portion 2013 Current Portion 2014 BONDS PAYABLE: GENERAL OBLIGATION BONDS PAYABLE (NOTE 11) $ 194,614 $ 11,435 $ 26,110 $ 179,939 $ $ 14,895 $ 165,044 $ 14,895 $ 15,460 REVENUE BONDS PAYABLE (NOTE 11) 1,380, ,425 19,975 1,660, ,405 70,665 1,764,855 40,900 38,945 UNAMORTIZED PREMIUM ON BONDS 80,705 32,558 11, ,621 10,342 10, ,456 8,153 10,658 TOTAL BONDS PAYABLE 1,655, ,418 57,727 1,941, ,747 96,067 2,031,355 63,948 65,063 NOTES PAYABLE AND CAPITAL LEASES: NOTES PAYABLE & OTHER CAPITAL ASSET RELATED (NOTE 11) 29,800 3,337 6,784 26, ,697 24,008 2,671 2,800 NOTES PAYABLE & OTHER NONCAPITAL ASSET RELATED (NOTE 11) , , ,568 CAPITAL LEASE OBLIGATIONS (NOTE 10) 8,620 16,629 3,422 21,827 2,878 4,248 20,457 4,724 4,640 TOTAL NOTES PAYABLE AND CAPITAL LEASES 39,387 20,385 10,414 49,358 3,874 6,945 46,287 7,782 9,008 OTHER LONG-TERM LIABILITIES: OBLIGATIONS UNDER SPLIT-INTEREST AGREEMENTS 30,227 1, ,502 5,182 36, POLLUTION REMEDIATION LIABILITY (NOTE 1) 6,000 7,000 13,000 9,000 22,000 3,400 DUE TO RELATED PARTY (NOTE 13) 16,366 16,366 5,500 SICK LEAVE (NOTE 1) 34,630 5,842 4,594 35,878 5,203 4,907 36,174 4,548 4,750 SELF-INSURANCE (NOTE 16) 62,919 28,605 11,816 79,708 13,917 26,175 67,450 11,914 18,995 NET PENSION OBLIGATION (NOTE 15) 127,465 38,550 2, ,372 38,550 3, ,895 2,341 2,834 TOTAL OTHER LIABILITIES 261,241 81,351 19, ,460 88,218 34, ,569 19,602 35,520 TOTAL LONG-TERM LIABILITIES $ 1,956,612 $ 445,154 $ 87,273 $ 2,314,493 $ 277,839 $ 137,121 $ 2,455,211 $ 91,332 $ 109,591 DISCRETE COMPONENT UNITS Long-term liability activity for the two-year period ended June 30, 2014 is summarized as follows: Balance at Additions/ Balance at Additions/ Balance at Current Current (Dollars in thousands) June 30, 2012 Transfers Reductions June 30, 2013 Transfers Reductions June 30, 2014 Portion 2013 Portion 2014 VALLEY MEDICAL CENTER LIMITED TAX GENERAL OBLIGATION BONDS $ 255,462 $ $ 5,892 $ 249,570 $ $ 6,067 $ 243,503 $ 6,145 $ 6,320 REVENUE BONDS 21,388 1,230 20,158 1,300 18,858 1,520 1,585 BUILD AMERICA BONDS 61,155 61,155 61,155 NOTES PAYABLE & OTHER 1, ,100 1, , TOTAL LONG-TERM LIABILITIES $ 339,870 $ $ 7,887 $ 331,983 $ 1,251 $ 8,311 $ 324,923 $ 8,437 $ 8,439 NORTHWEST HOSPITAL REVENUE BONDS $ 78,000 $ $ 2,000 $ 76,000 $ $ 2,600 $ 73,400 $ 2,600 $ 2,800 NOTES PAYABLE & CAPITAL LEASES 18,391 1,537 16,854 3,209 13,645 1,625 1,175 TOTAL LONG-TERM LIABILITIES $ 96,391 $ $ 3,537 $ 92,854 $ $ 5,809 $ 87,045 $ 4,225 $ 3,975 UNIVERSITY OF WASHINGTON / 24

30 NOTE 10: Leases Future minimum lease payments under capital leases, and the present value of the net minimum lease payments, as of June 30, 2014, are as follows: CAPITAL LEASES Future Year (Dollars in thousands) Payments 2015 $ 5, , , , ,627 THEREAFTER 6,096 TOTAL MINIMUM LEASE PAYMENTS 22,216 LESS: AMOUNT REPRESENTING INTEREST COSTS 1,759 PRESENT VALUE OF MINIMUM PAYMENTS $ 20,457 Buildings and equipment under capital leases were as follows: (Dollars in thousands) Balance at June 30, 2012 Additions Retirements Balance at June 30, 2013 Additions Retirements Balance at June 30, 2014 EQUIPMENT $ 29,062 $ 16,630 $ 14,989 $ 30,703 $ 2,878 $ 702 $ 32,879 REAL ESTATE 9,987 9,987 9,987 TOTAL 39,049 16,630 14,989 40,690 2,878 10,689 32,879 LESS ACCUMULATED DEPRECIATION: EQUIPMENT 20,996 5,027 14,989 11,034 5, ,904 REAL ESTATE 9,987 9,987 9,987 TOTAL ACCUMULATED DEPRECIATION 30,983 5,027 14,989 21,021 5,572 10,689 15,904 LEASED CAPITAL ASSETS, NET $ 8,066 $ 11,603 $ - $ 19,669 $ (2,694) $ - $ 16,975 OPERATING LEASES The University has certain lease agreements in effect that are considered operating leases, which are primarily for leased building space. During the years ended June 30, 2014 and 2013, the University recorded rent expenses of $38,791,000 and $31,303,000, respectively, for these leases. Future lease payments under these leases as of June 30, 2014 are as follows: Years (Dollars in Thousands) 2015 $ 47, , , , , , , ,753 THEREAFTER 62,172 TOTAL MINIMUM LEASE PAYMENTS $ 366,171 NOTE 11: Bonds and Notes Payable The bonds and notes payable at June 30, 2014 consist of state of Washington General Obligation and Refunding Bonds, University Revenue Bonds, and Notes Payable. These obligations have fixed interest rates ranging from 1.64% to 6.52%. Debt service requirements at June 30, 2014 were as follows: BONDS AND NOTES PAYABLE (Dollars in thousands) STATE OF WASHINGTON GENERAL OBLIGATION BONDS UNIVERSITY OF WASHINGTON REVENUE BONDS NOTES PAYABLE AND OTHER Year Principal Interest Principal Interest Principal Interest 2015 $ 15,460 $ 8,070 $ 38,945 $ 84,273 $ 4,368 $ 1, ,289 7,197 41,335 82,594 3, ,620 6,305 42,870 80,917 3, ,300 5,409 42,215 79,198 2, ,345 4,674 43,530 77,388 2, ,435 14, , ,227 8, ,595 2, , , , , , , THEREAFTER 383,375 37,517 TOTAL PAYMENTS $ 165,044 $ 48,065 $ 1,764,855 $ 1,467,020 $ 25,830 $ 4,706 FINANCIAL REPORT 2014 / 25

31 NOTES TO FINANCIAL STATEMENTS (CONTINUED) State law requires that the University reimburse the state for debt service payments relating to its portion of the state of Washington General Obligation and Refunding Bonds from Medical Center patient revenues, tuition, timber sales and other revenues. PLEDGED REVENUES The University has pledged $54,738,000 of future Student Facilities Fees and earnings on invested fees to retire the Student Facilities Refunding Revenue Bonds issued in Proceeds of the bonds were used to construct student recreational sports facilities. These funds will be committed until the fiscal year ending June 30, Fiscal year 2014 debt service on these bonds is 18.5% of the associated 2014 pledged revenues. ISSUANCE ACTIVITY On December 5, 2012, the University issued $299,425,000 in General Revenue & Refunding Bonds, 2012C, at a premium of $30,721,000. The proceeds were used to fund various projects such as renovation of Husky Stadium, the Husky Union Building, and the Ethnic Cultural Center; implementation of the Housing and Food Services Master Capital Plan (Phases 1-3); expansion of the UW Medical Center; improvements at the University s Bothell and Tacoma campuses; and construction of the new Molecular Engineering Building. In addition, proceeds were used to pay off $75,000,000 in commercial paper. The 2012C bonds have coupon rates ranging from 2.00% to 5.00% with an average coupon rate of 3.61%. The average life of the 2012C General Revenue bonds is years with final maturity on July 1, On September 5, 2013, the University issued $146,410,000 in General Revenue & Refunding Bonds, 2013, at a premium of $8,589,000. The proceeds were used to fund various projects such as renovation of Husky Stadium, implementation of the Housing and Food Services Master Capital Plan (Phases 2 and 3) and construction of the Husky Ballpark. In addition, proceeds were used to pay off $20,000,000 in commercial paper. The 2013 bonds have coupon rates ranging from 1.50% to 5.00% with an average coupon rate of 4.96%. The average life of the 2013 General Revenue bonds is years with final maturity on July 1, REFUNDING ACTIVITY On February 5, 2013, the state of Washington refunded General Obligation Bonds totaling $11,870,000 (UW portion) with new bond issuances totaling $11,435,000 and premium of $1,837,000. The refunded bonds had a coupon rate of 5.00%; the new bonds have an average interest rate of 4.50%. The refunding decreased the total debt service payments to be made over the next five years by $837,000 and resulted in a total economic gain of $815,000. On January 9, 2014, the University, through the Washington Economic Development Finance Authority, refunded Lease Revenue Bonds financing the University s blended component unit, Washington Biomedical Research Properties 1, totaling $29,590,000 with new bond issuances totaling $28,995,000 and premium of $1,752,000. The refunded bonds had coupon rates ranging from 3.95% to 5.375% with an average interest rate of 5.07%; the new bonds have an average interest rate of 4.37%. The refunding decreased the total debt service payments to be made over the next 21.5 years by $3,488,000 and resulted in a total economic gain of $2,445,000. The average life of the Washington Economic Development Finance Authority Lease Revenue Refunding Bonds, 2013 is 10.6 years with final maturity on June 1, Combined COP Refunding: On March 19, 2013, the state of Washington refunded Certificates of Participation (COP) totaling $2,740,000 with new COP issuances totaling $2,410,000 (plus premium of $358,000). The refunding decreased the total debt service payments to be made over the next 12 years by $338,000 and resulted in a total economic gain of $368,000. COMMERCIAL PAPER PROGRAM In July 2006, the Board of Regents authorized a commercial paper program with a maximum borrowing limit of $250,000,000, payable from University general revenues. This short-term borrowing program is primarily used to fund capital expenditures. As of, there was $58,500,000 and $25,000,000, respectively, in outstanding commercial paper. $8,500,000 of this debt was issued to refinance the Metropolitan Tract s line of credit (Note 7), and is therefore reflected as a component of the Metropolitan Tract line on the Statements of Net Position. During fiscal year 2013, the University issued an additional $75,000,000 and retired $75,000,000 of commercial paper debt. During fiscal year 2014, the University issued an additional $53,500,000 and retired $20,000,000 of commercial paper debt. SUBSEQUENT DEBT OFFERING On October 28, 2014, the University issued $34,000,000 in short-term commercial paper and used the proceeds to buy out the leasehold of the Cobb Building in the University s Metropolitan Tract. UNIVERSITY OF WASHINGTON / 26

32 NOTE 12: Operating Expenses by Function Operating expenses by functional classification for the years ended June 30, 2014 and 2013 are summarized as follows: Operating Expenses (Dollars in thousands) INSTRUCTION $ 1,036,506 $ 987,945 RESEARCH 766, ,162 PUBLIC SERVICE 41,553 47,818 ACADEMIC SUPPORT 297, ,222 STUDENT SERVICES 43,420 36,322 INSTITUTIONAL SUPPORT 223, ,872 OPERATION & MAINTENANCE OF PLANT 201, ,510 SCHOLARSHIPS & FELLOWSHIPS 138, ,897 AUXILIARY ENTERPRISES 285, ,615 MEDICAL-RELATED 1,042, ,687 DEPRECIATION/AMORTIZATION 308, ,099 TOTAL OPERATING EXPENSES $ 4,384,376 $ 4,121,149 Instruction Instruction includes expenses for all activities that are part of an institution s instruction program. Expenses for credit and noncredit courses; academic, vocational, and technical instruction; and tutorial instruction are included in this category. The University s professional and continuing education programs are also included. Research The research category includes all expenses for activities specifically organized to produce research, which are funded by federal, state, and private institutions. Public Service Public service includes activities conducted primarily to provide non-instructional services to individuals and groups other than the University and its students, such as community service programs, conferences, institutes and general advisory services. The activities of the University s public radio stations, Center for Educational Leadership and clinical trials are included in this category. Academic Support Academic support includes expenses incurred to provide support services for the institution s primary missions: instruction, research, and public service. The activities of the University s academic administration, libraries, museums and galleries, and information technology support for academic activities are included in this category. Student Services The student services category includes the Offices of Admissions and the University Registrar. The activities of the Center for Undergraduate Advising, Diversity, and Student Success, and the operations of the Rubenstein Pharmacy in the student health center are also included in this category. Institutional Support The institutional support category includes central activities that manage long-range planning for the institution, such as planning and programming operations, legal services, fiscal operations, space management, procurement and activities concerned with community and alumni relations. The University s central administration departments and information technology support for nonacademic activities are included in this category. Operation and Maintenance of Plant The operation and maintenance of plant category includes the administration, operation, maintenance, preservation, and protection of the institution s physical plant. Scholarships and Fellowships This category includes expenses for scholarships and fellowships and other financial aid not funded from existing University resources. Financial aid funded from existing University resources are considered scholarship allowances, which are reflected as an offset to tuition revenues. Expenditure of amounts received from the Washington State Need grant, Washington Higher Education grant, and Pell grants are reflected in this manner. Auxiliary Enterprises Auxiliary enterprises furnish goods or services to students, faculty, staff or the general public. These units charge a fee directly related to the cost of the goods or services. A distinguishing characteristic of an auxiliary enterprise is that it operates as a self-supporting activity. The activities of the University s Intercollegiate Athletics, Commuter Services and Housing and Food Services departments are included in this category. Medical-related The medical-related category includes all expenses associated with patient-care operations, including nursing and other professional services, general services, administrative services, and fiscal services. The activities of UWMC, UWP, and Neighborhood Clinics are included in this category (Note 1). Depreciation/Amortization Depreciation and amortization reflect a periodic expensing of the cost of capitalized assets such as buildings, equipment, software or other intangible assets, spread over their estimated useful lives. FINANCIAL REPORT 2014 / 27

33 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 13: Related Parties Harborview Medical Center (HMC), a hospital and Level I adult and pediatric trauma center located in Seattle, is a component unit of King County, Washington. It has been managed by the University under a management contract between King County and the University since The current management contract will be in effect through June 30, Under the contract, the HMC Board of Trustees determines major institutional policies and retains control of programs and fiscal matters, while King County retains ultimate control over capital programs and capital budgets. The University is responsible for the operations of HMC, including the provision of medical, dental and management services. All of the individuals employed at HMC, including physicians, are employees of the University. HMC expenses, including payroll, are reimbursed to the University from HMC fund sources. HMC revenues and expenses are not recognized in the University s financial statements. The University s financial statements do, however, include accounts receivable from HMC of $33,015,000 in 2014 and $23,404,000 in 2013, as well as HMC investments of $3,389,000 and $2,955,000, respectively, and accrued liabilities of $18,600,000 and $18,526,000, respectively. Beginning in fiscal year 2014, UW Medicine information technology began operating as a self-sustaining activity of the University (ITS department). The ITS department began recording enterprise-wide information technology capital assets that are purchased for use by UW Medicine entities. The Due To Related Party reflected in long-term liabilities (Note 9) of $16,366,000 at June 30, 2014 represents HMC s funding of the enterprise-wide information technology which will be recognized by the ITS department over the useful life of the asset. The University of Washington Foundation (UWF) is a nonprofit organization that performs fundraising activities on behalf of the University. The UWF is not included in the University s financial statements as a component unit because gifts and grants that are made to the UWF are immediately transferred to the University. In 2014 and 2013, the UWF transferred $53,510,000 and $64,813,000, respectively, to the University in gifts and grants received on its behalf; these are included in the financial statements of the University. The remaining amounts retained by the UWF are not significant to the University s financial statements. The University of Washington Alumni Association is a tax-exempt entity that was established to connect and celebrate alumni and to support the University s mission. The Alumni Association received $2,564,000 and $2,491,000 from the University in support of its operations in fiscal years 2014 and 2013, respectively. During fiscal year 2013, UWMC provided $2,100,000 to Northwest Hospital (NWH) to mitigate the negative impact of several state program reductions including the hospital safety net funding. This amount is presented in the Statements of Revenues, Expenses and Changes in Net Position for the University as a reduction of Patient Services revenue and for NWH as an increase in Patient Services revenue. In addition, $8,321,000 of capital funding was also provided by UWMC to NWH during fiscal year 2013, and is reflected by the University in Other Nonoperating Revenues (Expenses) and by NWH in Capital Grants, Gifts and Other. NOTE 14: Other Post Employment Benefits (OPEB) Healthcare and life insurance programs for employees of the state of Washington are administered by the Washington State Health Care Authority (HCA). The HCA calculates the premium amounts each year that are sufficient to fund the statewide health and life insurance programs on a pay-as-you-go basis. These costs are passed through to individual state agencies based upon active employee headcount; the agencies pay the premiums for active employees to the HCA. The agencies may also charge employees for certain higher cost options elected by the employee. State of Washington retirees may elect coverage through state health and life insurance plans, for which they pay less than the full cost of the benefits, based on their age and other demographic factors. The healthcare premiums for active employees, which are paid by the agency during employees working careers, subsidize the underpayments of retirees. An additional factor in the OPEB obligation is a payment that is required by the state legislature to reduce the premiums for retirees covered by Medicare (an explicit subsidy). For both calendar years 2014 and 2013, this amount was $150 per retiree eligible for parts A and B of Medicare. This is also passed through to state agencies through active employee rates charged to the agency. There is no formal state or University plan that underlies the subsidy of retiree health and life insurance. ACTUARIAL STUDY Actuarial studies, performed every two years by the Washington Office of the State Actuary, calculated that the total OPEB obligation of the state of Washington at January 1, 2013 and 2011 was $3.7 billion and $3.5 billion, respectively. The annual required contribution was $342 million and $321 million for the state of Washington for 2013 and 2011, respectively. The actuary calculated the OPEB obligation based on individual state employee data, including age, retirement eligibility and length of service. The probability of an employee of a given age and length of service retiring and receiving OPEB benefits is based on statewide historical data. UNIVERSITY OF WASHINGTON / 28

34 The actuary s allocation of the cumulative statewide liability related to the University and HMC (an unconsolidated related party), was estimated at approximately $671 million and $605 million for 2013 and 2011, respectively. These amounts are not included in the University s financial statements. The University paid $288 million and $289 million for healthcare expenses in 2014 and 2013, respectively, which included its pay-asyou-go portion of the OPEB liability, calculated by the actuary at $8.6 million and $6.8 million in 2014 and 2013, respectively. The State Actuary s report is available at: osa.leg.wa.gov/actuarial_services/opeb/ OPEB.htm NOTE 15: Pension Plans The University offers two contributory plans: the Washington State Public Employees Retirement System (PERS) plan, a defined-benefit retirement plan; and the University of Washington Retirement Plan (UWRP), a defined-contribution plan. The University of Washington Supplemental Retirement Plan, a defined-benefit plan, is closed to employees who were not active participants on February 28, PUBLIC EMPLOYEES RETIREMENT SYSTEM Plan Description: The University contributes to PERS, a cost sharing, multipleemployer, defined-benefit pension plan administered by the state of Washington Department of Retirement Systems. PERS Plan 1 provides retirement and disability benefits and minimum benefit increases beginning at age 66 to eligible nonacademic plan members hired prior to October 1, PERS Plans 2 and 3 provide retirement and disability benefits and a cost-ofliving allowance to eligible nonacademic plan members hired on or after October 1, In addition, PERS Plan 3 has a defined-contribution component, which is fully funded by employee contributions. The authority to establish and amend benefit provisions resides with the legislature. The Washington State Department of Retirement Systems issues a publicly available financial report that includes financial statements and required supplementary information for PERS. The report may be obtained by writing to the Department of Retirement Systems, P.O. Box 48380, Olympia, Washington , or visiting Funding Policy: The Office of the State Actuary, using funding methods prescribed by statute, determines actuarially required contribution rates for PERS. Plan 1 members were required to contribute 6% of their annual covered salary in fiscal years 2014 and Contributions for Plan 2 members are determined by the aggregate method, and may vary over time. The contribution rate for Plan 2 employees at June 30, 2014 and 2013 was 4.9% and 4.6%, respectively. Plan 3 members can choose contributions ranging from 5% to 15% of salary, based on the age of the member. The defined-contribution benefit for PERS 3 will depend on the member s contributions, the investment earnings on those contributions, and if an annuity is taken, the age at which the member receives payment. The blended contribution rate for the University at, for each of PERS Plans 1, 2, and 3 was 9.21% and 7.21% respectively. The University s contributions to PERS for the years ended June 30, 2014, 2013, and 2012 were $81,662,000, $62,030,000 and $59,708,000, respectively, as determined by rates established in accordance with RCW UNIVERSITY OF WASHINGTON RETIREMENT PLAN (403(B)) Faculty, librarians and professional staff are eligible to participate in the University of Washington Retirement Plan, a 403(b) defined-contribution plan administered by the University. 403(b) Plan Description: Contributions to the plan are invested by participants in annuity contracts or mutual fund accounts offered by one or more fund sponsors. Employees have at all times a 100% vested interest in their accumulations. Benefits from the plan are available upon separation or retirement at the member s option. RCW 28B et. seq. assigns the authority to the University of Washington Board of Regents to establish and amend benefit provisions. The number of participants in the 403 (b) plan for the years ended June 30, 2014 and 2013 were 14,993 and 14,495, respectively. 403(b) Funding Policy: Employee contribution rates, based on age, are 5%, 7.5% or 10% of salary. The University matches the contributions of employees. Within parameters established by the legislature, contribution requirements may be established or amended by the University of Washington Board of Regents. Employee and employer contributions for the years ended were $97,763,000 and $90,837,000, respectively. FINANCIAL REPORT 2014 / 29

35 NOTES TO FINANCIAL STATEMENTS (CONTINUED) UNIVERSITY OF WASHINGTON SUPPLEMENTAL RETIREMENT PLAN (401(A)) The University of Washington Supplemental Retirement Plan (UWSRP), a 401(a) defined-benefit retirement plan, operates in tandem with the 403(b) plan and is closed to new participants. The Unfunded Actuarial Accrued Liability (UAL) and Annual Required Contribution (ARC) as of July 1 of the respective years were: (Dollars in thousands) UAL $ 292,535 $ 235,048 $ 218,036 NORMAL COST $ 9,529 $ 10,774 $ 8,860 AMORTIZATION OF UAL, INCLUDING INTEREST 29,021 19,607 17,220 ARC $ 38,550 $ 30,381 $ 26,080 Actuarial assumptions (Dollars in thousands) PAYROLL COVERED BY PLAN $ 1,047,000 $ 1,129,000 $ 976,000 RATE OF RETURN ASSUMPTION 4.25% 4.25% 5.00% SALARY INCREASES FOR YEARS 1 AND 2 3% 2% 2% SALARY INCREASE FOR THIRD YEAR 3% 4% 4% SALARY INCREASES THEREAFTER 3% 4% 4% The UAL and ARC were established using the entry age normal cost method. The following table reflects the activity in the Net Pension Obligation for the years ended June 30, 2014, 2013 and 2012: (Dollars in thousands) BALANCE AT BEGINNING OF FISCAL YEAR $ 163,372 $ 127,465 $ 99,124 ARC 38,550 38,550 30,381 PAYMENTS TO BENEFICIARIES (3,027) (2,643) (2,040) BALANCE AT END OF FISCAL YEAR $ 198,895 $ 163,372 $ 127, (a) Plan Description: This plan provides for a supplemental payment component, which guarantees a minimum retirement benefit based upon a one-time calculation at each eligible participant s retirement date. The University makes direct payments to qualifying retirees when the retirement benefits provided by the 403(b) plan do not meet the benefit goals. 401(a) Plan Funding: The University received an actuarial valuation of the UWSRP with a valuation date of July 1, The previous evaluations were performed in 2011 and The University has set aside $177,019,000 and $148,270,000 as of June 30, 2014 and 2013, respectively, for this liability. These funds do not meet the GASB technical definition of Plan Assets since they have not been segregated and restricted in a trust or equivalent arrangement. The UAL shown in the table above, therefore, does not reflect a credit for these amounts. NOTE 16: Commitments and Contingencies Authorized expenditures for construction projects unexpended as of June 30, 2014 and 2013 were $176,659,000 and $156,326,000, respectively. These expenditures will be funded from local funds, debt proceeds and state appropriations. The University receives and expends substantial amounts under federal and state grants, contracts and programs. This funding is used for research, student aid, Medical Center operations and other programs, and is subject to audit by governmental granting agencies. Certain grant and contract costs billed to the federal government are subject to audit under OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The University is also involved in various other claims and legal actions arising in the ordinary course of business. University management believes that any liabilities arising from these matters will not have a material effect on the University s financial statements. The University is exposed to risk of loss related to tort liability, injuries to employees and loss of property. The University purchases insurance protection for workers compensation as well as marine, aviation and certain other risks. The University also purchases insurance protection for loss of property at self-sustaining units, bondfinanced buildings and where otherwise required by contract; otherwise, the risk of property loss is retained, unfunded. For medical professional, general, employment practices and automobile liability, the University maintains a program of selfinsurance reserves and excess insurance coverage. The self-insurance reserve represents the estimated ultimate cost of settling claims resulting from events that have occurred on or before the Statements of Net Position date. The reserve includes the undiscounted amounts that will be required for future payments of claims that have been reported, and claims related to events that have occurred but have not yet been reported. UNIVERSITY OF WASHINGTON / 30

36 The self-insurance reserve is estimated through an actuarial calculation and included in Long-Term Liabilities. Changes in the self-insurance reserve for the years ended June 30, 2014, 2013, and 2012 are noted below: (Dollars in thousands) RESERVE AT BEGINNING OF FISCAL YEAR $ 79,708 $ 62,919 $ 50,092 INCURRED CLAIMS AND CHANGES IN ESTIMATES 13,917 28,605 24,839 CLAIM PAYMENTS (26,175) (11,816) (12,012) RESERVE AT END OF FISCAL YEAR $ 67,450 $ 79,708 $ 62,919 On October 26, 2012, the Commissioners of Public Hospital District No. 1 filed a lawsuit alleging that Valley Medical Center lacked the authority to assent to the strategic alliance agreement and are seeking to prevent the Board of Trustees formed by the strategic alliance agreement from exercising legislative responsibilities of the District s elected commissioners. The King County Superior Court ruled for the University, and the case has been appealed. Although the University cannot predict the result of this appeal, University management believes that the lawsuit will not have a material adverse impact upon the financial position of the University. During fiscal year 2014, the University entered into a Master Licensing Agreement with Starbucks Corporation. In accordance with this agreement, the University is obligated to build and operate eight Starbucks licensed stores on its campuses. Three stores must be in operation by June 30, 2018, and the remaining stores must be in operation by June 30, The term of each store s license extends ten years from the date the store is placed in service. In exchange, according to the ten-year Sponsorship Agreement also entered into during fiscal year 2014, Starbucks has agreed to pay the University a sponsorship fee totaling $10,000,000 through fiscal year FINANCIAL REPORT 2014 / 31

37 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 17: Blended Component Units Condensed combining statements for the University and its blended component units are shown below: (Dollars in thousands) Statements of Net Position June 30, 2014 Combined Entities Eliminations University of Washington Total Blended Component Units Medical Entities Real Estate Entities ASSETS AND DEFERRED OUTFLOWS OF RESOURCES CURRENT ASSETS: TOTAL CURRENT ASSETS $ 1,537,383 $ (9,073) $ 1,467,956 $ 78,500 $ 64,357 $ 14,143 NONCURRENT ASSETS: TOTAL OTHER ASSETS 4,316,027 (8,285) 4,233,315 90,997 88,957 2,040 CAPITAL ASSETS, NET 4,044,796 3,721, ,391 14, ,075 TOTAL ASSETS 9,898,206 (17,358) 9,422, , , ,258 DEFERRED OUTFLOWS OF RESOURCES: UNAMORTIZED LOSS ON BOND REFUNDING 14,359 14,359 TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES $ 9,912,565 $ (17,358) $ 9,437,035 $ 492,888 $ 167,630 $ 325,258 LIABILITIES TOTAL CURRENT LIABILITIES $ 871,970 $ (26,629) $ 810,694 $ 87,905 $ 60,664 $ 27,241 TOTAL NONCURRENT LIABILITIES 2,398,046 2,095, , ,100 TOTAL LIABILITIES 3,270,016 (26,629) 2,906, ,005 60, ,341 NET POSITION NET INVESTMENT IN CAPITAL ASSETS 2,018,077 2,007,437 10,640 14,316 (3,676) RESTRICTED: NONEXPENDABLE 1,257,297 1,257,297 EXPENDABLE 1,628,532 1,628,532 UNRESTRICTED 1,738,643 9,271 1,637,129 92,243 92,650 (407) TOTAL NET POSITION 6,642,549 9,271 6,530, , ,966 (4,083) TOTAL LIABILITIES AND NET POSITION $ 9,912,565 $ (17,358) $ 9,437,035 $ 492,888 $ 167,630 $ 325,258 (Dollars in thousands) Total Blended Combined University of Component Real Estate Statements of Net Position June 30, 2013 Entities Eliminations Washington Units Medical Entities Entities ASSETS CURRENT ASSETS: TOTAL CURRENT ASSETS $ 1,459,050 $ (9,587) $ 1,384,933 $ 83,704 $ 61,368 $ 22,336 NONCURRENT ASSETS: TOTAL OTHER ASSETS 3,732,174 3,630, ,239 90,137 11,102 CAPITAL ASSETS, NET 3,975,957 3,641, ,732 11, ,144 TOTAL ASSETS $ 9,167,181 $ (9,587) $ 8,657,093 $ 519,675 $ 163,093 $ 356,582 LIABILITIES TOTAL CURRENT LIABILITIES $ 729,414 $ (28,746) $ 662,260 $ 95,900 $ 50,194 $ 45,706 TOTAL NONCURRENT LIABILITIES 2,272,716 1,959, , ,640 TOTAL LIABILITIES 3,002,130 (28,746) 2,621, ,540 50, ,346 NET POSITION NET INVESTMENT IN CAPITAL ASSETS 2,038,495 2,031,336 7,159 11,588 (4,429) RESTRICTED: NONEXPENDABLE 1,182,986 1,182,986 EXPENDABLE 1,344,643 1,344,643 UNRESTRICTED 1,598,927 19,159 1,476, , ,311 1,665 TOTAL NET POSITION 6,165,051 19,159 6,035, , ,899 (2,764) TOTAL LIABILITIES AND NET POSITION $ 9,167,181 $ (9,587) $ 8,657,093 $ 519,675 $ 163,093 $ 356,582 UNIVERSITY OF WASHINGTON / 32

38 NOTE 17 CONTINUED (Dollars in thousands) Statements of Revenues, Expenses and Changes in Net Position Year ended June 30, 2014 REVENUES OPERATING REVENUES: Combined Entities Eliminations University of Washington Total Blended Component Units Medical Entities Real Estate Entities STUDENT TUITION AND FEES $ 838,796 $ $ 838,796 $ $ $ PATIENT SERVICES 1,206,918 (11,316) 1,029, , ,627 GRANT REVENUE 1,275,491 1,275,491 OTHER OPERATING REVENUE 592,766 (77,566) 624,757 45, ,323 TOTAL OPERATING REVENUE 3,913,971 (88,882) 3,768, , ,879 45,323 EXPENSES OPERATING EXPENSES: OTHER OPERATING EXPENSES 4,076,186 (78,994) 3,915, , ,558 11,403 DEPRECIATION / AMORTIZATION 308, ,367 17,823 1,613 16,210 TOTAL OPERATING EXPENSES 4,384,376 (78,994) 4,205, , ,171 27,613 OPERATING INCOME (LOSS) (470,405) (9,888) (436,935) (23,582) (41,292) 17,710 NONOPERATING REVENUES (EXPENSES) STATE APPROPRIATIONS 262, ,146 GIFTS 117, ,071 INVESTMENT INCOME 480, ,633 12,012 12,011 1 OTHER NONOPERATING REVENUES (EXPENSES) (1,349) (5,667) 4,318 23,348 (19,030) NET NONOPERATING REVENUES (EXPENSES) 858, ,183 16,330 35,359 (19,029) INCOME (LOSS) BEFORE OTHER REVENUES 388,108 (9,888) 405,248 (7,252) (5,933) (1,319) CAPITAL APPROPRIATIONS, GRANTS, GIFTS AND OTHER 33,849 33,849 GIFTS TO PERMANENT ENDOWMENTS 55,541 55,541 TOTAL OTHER REVENUES 89,390 89,390 INCREASE (DECREASE) IN NET POSITION 477,498 (9,888) 494,638 (7,252) (5,933) (1,319) NET POSITION NET POSITION BEGINNING OF YEAR 6,165,051 19,159 6,035, , ,899 (2,764) NET POSITION END OF YEAR $ 6,642,549 $ 9,271 $ 6,530,395 $ 102,883 $ 106,966 $ (4,083) (Dollars in thousands) Statements of Revenues, Expenses and Changes in Net Position Year ended June 30, 2013 Combined Entities Eliminations University of Washington Total Blended Component Units Medical Entities Real Estate Entities REVENUES OPERATING REVENUES: STUDENT TUITION AND FEES $ 808,053 $ $ 808,053 $ $ $ PATIENT SERVICES 1,162,389 (16,942) 991, , ,848 GRANT REVENUE 1,310,718 1,310,718 OTHER OPERATING REVENUE 501,760 (26,003) 504,327 23, ,104 TOTAL OPERATING REVENUE 3,782,920 (42,945) 3,614, , ,180 23,104 EXPENSES OPERATING EXPENSES: OTHER OPERATING EXPENSES 3,841,050 (75,298) 3,698, , ,455 8,693 DEPRECIATION / AMORTIZATION 280, ,297 17,802 1,648 16,154 TOTAL OPERATING EXPENSES 4,121,149 (75,298) 3,960, , ,103 24,847 OPERATING INCOME (LOSS) (338,229) 32,353 (345,916) (24,666) (22,923) (1,743) NONOPERATING REVENUES (EXPENSES) STATE APPROPRIATIONS 218, ,165 GIFTS 101, ,823 INVESTMENT INCOME 341, ,200 6,041 6,037 4 OTHER NONOPERATING REVENUES (EXPENSES) (31,325) (21,591) (21,995) 12,261 21,749 (9,488) NET NONOPERATING REVENUES (EXPENSES) 629,904 (21,591) 633,193 18,302 27,786 (9,484) INCOME (LOSS) BEFORE OTHER REVENUES 291,675 10, ,277 (6,364) 4,863 (11,227) CAPITAL APPROPRIATIONS, GRANTS, GIFTS AND OTHER 73,886 73,886 GIFTS TO PERMANENT ENDOWMENTS 57,882 57,882 TOTAL OTHER REVENUES 131, ,768 INCREASE (DECREASE) IN NET POSITION 423,443 10, ,045 (6,364) 4,863 (11,227) NET POSITION NET POSITION BEGINNING OF YEAR 5,741,608 8,397 5,616, , ,036 8,463 NET POSITION END OF YEAR $ 6,165,051 $ 19,159 $ 6,035,757 $ 110,135 $ 112,899 $ (2,764) FINANCIAL REPORT 2014 / 33

39 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 17 CONTINUED (Dollars in thousands) Statements of Cash Flows Year ended June 30, 2014 Combined Entities Eliminations University of Washington Total Blended Component Units Medical Entities Real Estate Entities NET CASH PROVIDED (USED) BY: OPERATING ACTIVITIES $ (64,337) $ $ (54,721) $ (9,616) $ (29,177) $ 19,561 NONCAPITAL FINANCING ACTIVITIES 461, ,478 14,771 14,771 CAPITAL AND RELATED FINANCING ACTIVITIES (319,011) (298,903) (20,108) (875) (19,233) INVESTING ACTIVITIES (76,979) (88,028) 11,049 13,191 (2,142) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 922 4,826 (3,904) (2,090) (1,814) CASH AND CASH EQUIVALENTS BEGINNING OF THE YEAR 78,206 55,433 22,773 19,128 3,645 CASH AND CASH EQUIVALENTS END OF THE YEAR $ 79,128 $ $ 60,259 $ 18,869 $ 17,038 $ 1,831 (Dollars in thousands) Statements of Cash Flows Year ended June 30, 2013 Combined Entities Eliminations University of Washington Total Blended Component Units Medical Entities Real Estate Entities NET CASH PROVIDED (USED) BY: OPERATING ACTIVITIES $ (115,280) $ $ (161,271) $ 45,991 $ (23,738) $ 69,729 NONCAPITAL FINANCING ACTIVITIES 413, ,341 24,253 24,253 CAPITAL AND RELATED FINANCING ACTIVITIES (331,829) (325,546) (6,283) 216 (6,499) INVESTING ACTIVITIES 61, ,128 (62,565) 9,769 (72,334) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,048 26,652 1,396 10,500 (9,104) CASH AND CASH EQUIVALENTS BEGINNING OF THE YEAR 50,158 28,781 21,377 8,628 12,749 CASH AND CASH EQUIVALENTS END OF THE YEAR $ 78,206 $ $ 55,433 $ 22,773 $ 19,128 $ 3,645 UNIVERSITY OF WASHINGTON / 34

40 NOTE 18: Discrete Component Units Condensed combining statements for the University s discrete component units are shown below: June 30, 2014 June 30, 2013 (Dollars in thousands) Statements of Net Position Total Discrete Component Units Northwest Hospital Valley Medical Center Total Discrete Component Units Northwest Hospital Valley Medical Center ASSETS CURRENT ASSETS: TOTAL CURRENT ASSETS $ 221,876 $ 71,416 $ 150,460 $ 225,288 $ 81,949 $ 143,339 NONCURRENT ASSETS: TOTAL OTHER ASSETS 153,484 55,393 98, ,469 50,845 85,624 CAPITAL ASSETS, NET 489, , , , , ,704 TOTAL ASSETS $ 865,040 $ 247,375 $ 617,665 $ 872,704 $ 256,037 $ 616,667 LIABILITIES AND DEFERRED INFLOWS OF RESOURCES TOTAL CURRENT LIABILITIES $ 143,106 $ 64,904 $ 78,202 $ 144,047 $ 62,615 $ 81,432 TOTAL NONCURRENT LIABILITIES 399,554 83, , ,175 88, ,546 TOTAL DEFERRED INFLOWS OF RESOURCES 8,585 8,585 TOTAL LIABILITIES AND DEFERRED INFLOWS OF RESOURCES 551, , , , , ,978 NET POSITION NET INVESTMENT IN CAPITAL ASSETS 84,800 40,704 44,096 93,222 38,227 54,995 RESTRICTED: NONEXPENDABLE 1,775 1,775 1,773 1,773 EXPENDABLE 8, ,814 8, ,728 UNRESTRICTED 218,709 56, , ,950 63, ,966 TOTAL NET POSITION 313,795 99, , , , ,689 TOTAL LIABILITIES, DEFERRED INFLOWS OF RESOURCES AND NET POSITION $ 865,040 $ 247,375 $ 617,665 $ 872,704 $ 256,037 $ 616,667 Year Ended June 30, 2014 Year Ended June 30, 2013 (Dollars in thousands) Statements of Revenues, Expenses and Changes in Net Position Total Discrete Component Units Northwest Hospital Valley Medical Center Total Discrete Component Units Northwest Hospital Valley Medical Center REVENUES OPERATING REVENUES: PATIENT SERVICES $ 752,980 $ 309,734 $ 443,246 $ 741,581 $ 312,206 $ 429,375 OTHER OPERATING REVENUE 45,556 14,607 30,949 38,888 15,601 23,287 TOTAL OPERATING REVENUE 798, , , , , ,662 EXPENSES OPERATING EXPENSES: OTHER OPERATING EXPENSES 738, , , , , ,157 DEPRECIATION / AMORTIZATION 51,018 17,856 33,162 52,028 19,118 32,910 TOTAL OPERATING EXPENSES 789, , , , , ,067 OPERATING INCOME (LOSS) 9,210 (5,320) 14,530 (5,540) 8,865 (14,405) NONOPERATING REVENUES (EXPENSES) PROPERTY TAX REVENUE 16,342 16,342 16,254 16,254 INVESTMENT INCOME 7,390 4,362 3,028 7,519 4,569 2,950 OTHER NONOPERATING EXPENSES (35,657) (4,462) (31,195) (25,333) (4,150) (21,183) NET NONOPERATING REVENUES (EXPENSES) (11,925) (100) (11,825) (1,560) 419 (1,979) INCOME (LOSS) BEFORE OTHER REVENUES (2,715) (5,420) 2,705 (7,100) 9,284 (16,384) CAPITAL GRANTS, GIFTS AND OTHER ,340 8,340 INCREASE (DECREASE) IN NET POSITION (2,687) (5,392) 2,705 1,240 17,624 (16,384) NET POSITION NET POSITION BEGINNING OF YEAR 316, , , ,242 87, ,073 NET POSITION END OF YEAR $ 313,795 $ 99,401 $ 214,394 $ 316,482 $ 104,793 $ 211,689 FINANCIAL REPORT 2014 / 35

41 UNIVERSITY OF WASHINGTON / 36

42 BOARD OF REGENTS* Orin C. Smith, Chair William S. Ayer, Vice Chair Kristianne Blake Joanne Harrell Jeremy Jaech Constance W. Rice Rogelio Riojas Kiana M. Scott Patrick M. Shanahan Herb Simon ADMINISTRATIVE OFFICERS* Michael K. Young President Ana Mari Cauce Provost and Executive Vice President Gerald J. Baldasty Senior Vice Provost for Academic and Student Affairs Randy Hodgins Vice President for External Affairs Denzil Suite Vice President for Student Life Mindy Kornberg Vice President for Human Resources Connie Kravas Vice President for University Advancement Sheila Edwards Lange Vice President for Minority Affairs and Vice Provost for Diversity Paul G. Ramsey CEO, UW Medicine, Executive Vice President for Medical Affairs and Dean of the School of Medicine Kelli Trosvig Vice President for UW Information Technology and Chief Information Officer V Ella Warren Senior Vice President for Finance and Facilities and Treasurer, Board of Regents * As of June 30, 2014 This publication was prepared by Financial Management. Published December The 2014 UW Financial Report and reports from previous years are available at annualreport.uw.edu. For more information, contact Financial Accounting at or accountg@uw.edu PHOTOGRAPHY: Stephen Forbes, Katherine B. Turner DESIGN, PRODUCTION, AND PRINT COORDINATION: UW Creative Communications VISIT OUR WEBSITE: uw.edu 2014 University of Washington Printed on recycled paper containing 30% post-consumer fiber

43

44 SUPPLEMENTAL BONDHOLDER INFORMATION

45 STUDENTS & ENROLLMENT AUTUMN QUARTER UNDERGRADUATE Freshmen Applied 25,269 27,469 29,723 33,857 35,382 Accepted 14,753 16,527 18,152 19,560 20,510 Percent Accepted to Applied 58% 60% 61% 58% 58% Enrolled 6,122 6,546 6,931 7,233 7,429 Percent Enrolled to Accepted 41% 40% 38% 37% 36% Transfers Applied 7,430 8,277 8,415 8,809 9,480 Accepted 3,854 4,250 4,448 4,705 4,826 Percent Accepted to Applied 52% 51% 53% 53% 51% Enrolled 2,783 3,046 3,084 3,252 3,308 Percent Enrolled to Accepted 72% 72% 69% 69% 69% Undergraduate FTE Bothell 2,438 2,934 3,327 3,794 4,101 Seattle 27,964 28,118 28,011 28,597 29,359 Tacoma 2,431 2,775 3,064 3,346 3,565 Total All Campuses 32,833 33,827 34,402 35,737 37,025 Undergraduate Headcount Bothell 2,751 3,254 3,648 4,106 4,406 Seattle 30,093 29,822 29,771 30,148 31,099 Tacoma 2,771 3,116 3,366 3,641 3,826 Total All Campuses 35,615 36,192 36,785 37,895 39,331 Additional Enrollment Statistics Percent Non-resident Students (1) 25% 32% 30% 30% 31% Percent Retention (Freshman to Sophomore) 92% 92% 91% 91% 92% Mean GPA Median GPA Percent of Class Reporting GPA Data 99% 100% 100% 100% 100% Mean Combined SAT Scores Median Combined SAT Scores Percent of Class Reporting SAT Data 90% 86% 86% 87% 84% GRADUATE Applied 23,316 24,692 26,350 27,381 29,851 Accepted 6,844 7,493 8,106 8,980 9,106 Percent Accepted to Applied 29% 30% 31% 33% 31% Enrolled 3,485 3,720 3,643 4,383 4,389 Percent Enrolled to Accepted 51% 50% 45% 49% 48% Graduate FTE 12,499 12,820 13,049 13,557 13,751 Graduate Headcount 12,389 12,574 12,782 13,177 13,333 (1) Includes Graduate and Undergraduate Students. Unless otherwise noted all figures include Seattle, Tacoma, and Bothell campuses.

46 STUDENTS & ENROLLMENT CONTINUED AUTUMN QUARTER PROFESSIONAL Law Applied 2,560 2,656 2,930 2,624 2,946 Accepted Enrolled Law Headcount Pharmacy Applied Accepted Enrolled Pharmacy Headcount Dentistry Applied 1, ,085 1,058 1,046 Accepted Enrolled Dental Headcount Medicine Applied 4,459 4,962 5,101 6,015 6,129 Accepted Enrolled Medicine Headcount Total Professional FTE 3,970 3,932 3,949 4,086 4,081 Total Professional Headcount 1,936 1,979 1,999 2,000 2,006 Tuition and Fees (full academic year) Undergraduate Resident $ 8,701 $ 10,574 $ 12,383 $ 12,397 $ 12,394 Undergraduate Non-Resident $ 25,329 $ 28,058 $ 29,938 $ 31,971 $ 33,513 Graduate Resident $ 11,989 $ 13,438 $ 14,698 $ 15,666 $ 16,683 Graduate Non-Resident $ 25,329 $ 26,308 $ 27,318 $ 28,119 $ 28,926 Business Masters Resident $ 25,099 $ 26,338 $ 27,608 $ 28,950 $ 30,339 Business Masters Non-Resident $ 37,419 $ 38,408 $ 40,158 $ 42,126 $ 44,175 Law Resident $ 24,339 $ 26,608 $ 29,948 $ 31,983 $ 31,980 Law Non-Resident $ 37,299 $ 40,678 $ 42,918 $ 45,024 $ 45,021 Pharmacy Resident $ 18,389 $ 20,778 $ 24,018 $ 26,325 $ 26,496 Pharmacy Non-Resident $ 33,659 $ 37,878 $ 43,688 $ 47,964 $ 49,215 Medical Resident $ 23,049 $ 25,548 $ 28,268 $ 30,186 $ 32,220 Medical Non-Resident $ 52,029 $ 54,528 $ 57,198 $ 59,175 $ 61,206 Dentistry Resident $ 23,869 $ 27,388 $ 32,948 $ 36,150 $ 39,654 Dentistry Non-Resident $ 50,049 $ 50,298 $ 53,018 $ 56,667 $ 60,555 University FTE Undergraduate 32,833 33,827 34,402 35,737 37,025 Graduate 12,499 12,820 13,049 13,557 13,751 Professional 3,970 3,932 3,949 4,086 4,081 Total University FTE 49,302 50,579 51,400 53,380 54,857 University Headcount Undergraduate 35,615 36,192 36,785 37,895 39,331 Graduate 12,389 12,574 12,782 13,177 13,333 Professional 1,936 1,979 1,999 2,000 2,006 Total University Headcount 49,940 50,745 51,566 53,072 54,670 Unless otherwise noted all figures include Seattle, Tacoma, and Bothell campuses.

47 FACULTY & OTHER DATA AUTUMN QUARTER FACULTY DATA Number of Faculty (1) 4,235 4,280 4,356 4,497 4,561 Tenure Rate (in %) 39% 39% 39% 37% 37% Percent Holding Terminal Degree (Ph.D., MD, DDS) 93% 93% 93% 92% 93% HOUSING AND DINING Room and Board (2) $ 7,581 $ 7,785 $ 8,091 $ 9,360 $ 10,055 Opening Occupancy (3) 5,774 5,677 5,294 6,403 6,607 Occupancy (4) 114% 116% 114% 111% 114% MEDICARE/MEDICAID PAYMENTS Percent of Total Clinical Revenue (5) N/A N/A 36% 37% 38% (1) Faculty headcount reflects core faculty comprised of professorial, instructional, and research categories. Headcount associated with temporary faculty categories is excluded. (2) Room and board pricing is for the full academic year. Starting Autumn 2013, room portion of annual room and board pricing is the weighted average of all Residence Hall double rooms in inventory, and dining amount is for a representative meal plan. (3) Effective October 31, 2014 numbers restated to reflect the number of students housed in Residents Halls. (4) Effective October 31, 2014 numbers restated to reflect as-built capacity and 10th day occupancy (occupancy that exceeds 100% is the result of housing three students in a room designed for two). (5) Percent of total clinical revenue. Medicare and Medicaid payments as a percentage of total clinical revenue. Includes Northwest Hospital and Valley Medical Center. Data not available for N/A Data not available.

48 ENDOWMENT AND OTHER RESOURCES FISCAL YEARS ($000) PORTFOLIO Endowment Market Value True $ 1,122,974 $ 1,354,585 $ 1,339,251 $ 1,493,747 $ 1,708,921 Term $ 31,756 $ 35,231 $ 33,513 $ 36,202 $ 56,776 Quasi $ 675,139 $ 785,477 $ 738,570 $ 816,744 $ 1,067,056 Total $ 1,829,869 $ 2,175,293 $ 2,111,334 $ 2,346,693 $ 2,832,753 Portfolio Breakdown Equity 72.2% 79.0% 81.0% 84.0% 86.0% Domestic 9.1% 13.0% 17.0% 19.0% 19.0% International 27.5% 29.0% 28.0% 32.0% 36.0% Absolute Return 20.7% 20.0% 17.0% 17.0% 20.0% Private Equity 9.1% 12.0% 13.0% 11.0% 7.0% Venture Capital 5.8% 5.0% 6.0% 5.0% 4.0% Real Assets 9.6% 7.0% 8.0% 7.0% 7.0% Fixed Income 6.3% 5.0% 9.0% 8.0% 7.0% Domestic 6.3% 5.0% 9.0% 8.0% 7.0% International 0.0% 0.0% 0.0% 0.0% 0.0% Cash 11.9% 9.0% 2.0% 1.0% 0.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% RETURN & SPENDING Annualized Rates of Return (1) One 12.5% 16.0% -0.9% 13.5% 15.8% Three -4.2% -0.1% 9.0% 9.3% 9.2% Five 5.0% 4.7% 0.2% 2.3% 11.2% Endowment Return & Spending (2) Total Annual Return on Endowment $ 201,000 $ 301,068 - $ 17,822 $ 284,736 $ 379,837 Amount of Annual Return Spent $ 59,015 $ 75,688 $ 85,104 $ 87,492 $ 117,222 Actual Annual Spending Rate 3.60% 4.14% 3.95% 4.14% 3.85% EXTERNALLY MANAGED FUNDS Total Annuity and Life Income Funds $ 65,589 $ 69,878 $ 66,514 $ 70,863 $ 86,212 Externally Managed Endowments $ 45,580 $ 51,806 $ 49,099 $ 49,755 $ 111,831 INVESTMENT POLICY CHANGE The Board of Regents adopted an amended Statement of Investment Objectives and Policy for the Invested Funds (IF) to allow for the creation of the Capital Assets Pool (CAP). The Capital Assets Pool may invest in University capital projects with maturities of up to thirty years. The Capital Assets Pool is capped at 10% of the IF while the range of 0-15% allows for market fluctuations. (1) Net of manager fees. (2) Prior to FY2009, annual distributions were 5% of the average market value of the Consolidated Endowment Fund for the previous three years. Under an interim spending policy, annual distributions per unit were reduced by 25% per year in FY2009 and FY2010. In October 2010, the Board of Regents approved a new long-term spending policy under which distributions to campus will be 4% of a 5-year moving average market value.

49 FUTURE DEBT SERVICE as of 6/30/14 FISCAL YEAR ($000) TOTAL GENERAL REVENUE DEBT SERVICE State General Obligation Bonds 23,530 25,487 23,925 19,709 19, ,440 State Certificates of Participation 3,394 3,383 3,396 3,044 2,900 7,431 Revenue Bonds General Revenue Bonds (1) 90,961 91,737 91,688 89,387 89,978 2,184,403 Other Revenue Bonds (2) 3,419 3,421 3,418 3,422 3,421 37,637 Lease Revenue Bonds (3) 28,835 28,772 28,681 28,604 27, ,570 Subtotal 123, , , , ,918 2,618,610 Interest on Commercial Paper (4) 35 Equipment Leases & Other 5,275 4,006 3,692 2,373 1,887 7,784 Total General Revenue Debt Service 155, , , , ,724 2,735,265 AFFILIATED ENTITIES Northwest Hospital Revenue Bonds 6,704 6,563 6,518 6,565 6,507 83,315 Valley Medical Center Revenue Bonds (5) 7,362 7,364 7,368 7,369 7, ,943 Equipment & Other 2,283 1,578 5,153 1, ,273 Total Affiliated Entities 16,349 15,505 19,039 14,935 14, ,531 Total Debt Service All Obligations 171, , , , ,313 2,972,796 Sub Totals may not foot due to rounding. (1) General Revenue Bonds Series 2007, 2008, 2009, 2009B, 2010A&B, 2011, 2012A, B & C, (2) Revenue Bond Series (3) 2005E Washington Biomedical Research Properties (WBRP), 2006J WBRP and 2013 WBRP. (4) Reflects interest to be paid on outstanding commercial paper of $58.5 million through 10/5/2014. (5) Does not include Limited Tax General Obligation Bonds payable by property tax revenues.

50 CONTINUING DISCLOSURE INFORMATION OS DISCLOSURE OBLIGATION The audited financial statements of the University for the prior fiscal year, prepared in accordance with generally accepted accounting principles. LOCATION IN BONDHOLDERS REPORT Tab 2 (UW Financial Report) The amount of outstanding University debt and other obligations in that fiscal year. Tab 2 (UW Financial Report - Note 9) Student enrollment information for that fiscal year, of the type provided in the table entitled STUDENT ENROLLMENT under the heading THE UNIVERSITY OF WASHINGTON Admissions, Student Enrollment and Faculty Information and distribution of undergraduate enrollment among University campuses. Information regarding the number of faculty, tenure rate, and percent holding terminal degrees for that fiscal year, of the type provided in the table entitled FACULTY DATA under the heading UNIVERSITY OF WASHINGTON Admissions, Student Enrollment and Faculty Information. Information regarding room and board fees, autumn opening occupancy, and occupancy for that fiscal year, of the type provided in the table entitled HOUSING AND DINING DATA under the heading UNIVERSITY OF WASHINGTON Admissions, Student Enrollment and Faculty Information. General Revenues, and General Revenue components, for that fiscal year, of the type provided in the table entitled GENERAL REVENUES under the heading UNIVERSITY OF WASHINGTON General Revenues. Grant and contract revenues for that fiscal year, and amount or percentage of grant and contract revenues from federal sources. Information regarding the amount or percentage of revenues from Medicare or Medicaid payments in that fiscal year Expenditures of State capital and operating appropriations to the University for such fiscal year, of the type provided in the table entitled Expenditures of State Appropriations to the University by Type under the heading UNIVERSITY OF WASHINGTON Other University Financial Information State Funding. Value of investments, including operating fund investments (currently referred to as Invested Funds ) and the Consolidated Endowment Fund, for that fiscal year A narrative description of any material changes to the University s investment policy or CEF distribution policy during the preceding fiscal year. Gift revenue for that fiscal year. University revenue by source for that fiscal year, of the type provided in the table University Revenues by Source under the heading UNIVERSITY OF WASHINGTON Other University Financial Information University Total Revenue by Source. Total University expenditures and percentages of expenditures by category for that fiscal year, of the type presented under the heading UNIVERSITY OF WASHINGTON Other University Financial Information University Expenditures. University total net assets and unrestricted net assets, of the type presented under the heading UNIVERSITY OF WASHINGTON Other University Financial Information University Net Assets. A description of any material changes to the University s obligations with respect to its pension plans, of the type presented under the heading PENSION PLANS. A description of any material changes to the University s obligations with respect to other post-employment benefits, of the type presented under the heading PENSION PLANS Other Post-Employment Retirement Benefits ( OPEB ). Amount of the University s self-insurance reserve, of the type presented under the heading PENSION PLANS Risk Management. Tab 3 (Supplemental Bondholder Information) Tab 3 (Supplemental Bondholder Information) Tab 3 (Supplemental Bondholder Information) Tab 4 (General Revenues) Tab 2 (UW Financial Report SRECNP) Tab 3 (Supplemental Bondholder Information) Tab 2 (UW Financial Report SRECNP) UW Financial Report - Note 6 Tab 3 (Supplemental Bondholder Information) Tab 2 (UW Financial Report SRECNP) Tab 2 (UW Financial Report - MD&A) Tab 2 (UW Financial Report - MD&A) Tab 2 (UW Financial Report - SNP) Tab 2 (UW Financial Report - Note 16) Tab 2 (UW Financial Report - Note 15) Tab 2 (UW Financial Report - Note 17) Source : 2015A (Taxable) and 2015B General Revenue Bond Official Statement.

51 SUPPLEMENTAL FINANCIAL REPORTS

52 UNIVERSITY OF WASHINGTON Supplementary Information (With Independent Auditors Report Thereon)

53 KPMG LLP Suite Eighth Avenue Seattle, WA Independent Auditors Report on Supplementary Information The Board of Regents University of Washington: We have audited the financial statements of the business-type activities of the University of Washington, an agency of the State of Washington, as of and for the years ended, and have issued our report thereon dated October 31, 2014, which contained an unmodified opinion on those financial statements. Our audits were performed for the purpose of forming an opinion on the financial statements as a whole. We have not performed any procedures with respect to the audited financial statements subsequent to October 31, The supplementary information included on pages 2 through 4 is presented for the purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. This report is intended solely for the information and use of the Board of Regents and management of the University of Washington and rating agencies and bondholders who have previously received the financial statements of the University of Washington as of and for the years ended, and our unmodified opinion thereon, for use in evaluating those financial statements, and is not intended to be and should not be used for any other purpose. November 14, 2014 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

54 UNIVERSITY OF WASHINGTON Reconciliation of Total University Revenue to General Revenue Years ended (Dollars in thousands) General revenue: Total revenue $ 4,953,409 4,601,792 Less: State appropriations 262, ,165 Grant and contract direct costs 1,080,088 1,109,871 Gifts 117, ,823 Revenues of component units 161, ,238 Student activities fees and U-Pass fees 43,539 40,082 Student technology fees, student building fees, student loan funds 71,576 66,726 Trust and endowment income, net unrealized gains on noninvested funds investments, metro tract net operating income, component unit investment income, and other restricted investment income 440, ,901 Capital appropriations 7,693 47,123 Capital grants, gifts and other 26,156 26,763 Other nonoperating revenues (expenses) 42,816 (19,780) Gifts to permanent endowments 55,541 57,882 Total general revenue $ 2,644,633 2,456,998 General revenue components: Student tuition and fees (less student activities fees, U-Pass fees, technology fees, building fees, and loan funds) $ 733, ,056 Grant and contract indirect costs 242, ,502 Invested funds distribution and net invested funds unrealized gains and losses (note 2) 39,742 16,340 Sales and services of educational departments 212, ,320 Auxiliary systems and patient services 1,332,929 1,194,740 Other operating revenues 82,782 90,040 Total general revenue $ 2,644,633 2,456,998 See accompanying notes to supplementary information. 2

55 UNIVERSITY OF WASHINGTON Reconciliation of Total University of Washington Unrestricted Net Position to General Net Position (Dollars in thousands) Total University unrestricted net position per financial statements $ 1,738,643 1,598,927 Less: Auxiliary fund balances: Student and activities fees 19,280 18,542 Component units: Association of University Physicians 85,788 93,345 UW Neighborhood Clinics 10,705 9,449 Real estate entities 7,879 17,981 Total to be excluded 123, ,317 General net position $ 1,614,991 1,459,610 See accompanying notes to supplementary information. 3

56 UNIVERSITY OF WASHINGTON Notes to Supplementary Information (1) Basis of Presentation The General Revenue schedule presents the general income of the University of Washington (University) that is not restricted in its use by law, regulation, or contract. General Revenues, as defined in the bond agreements, are revenues pledged to bondholders under the University s General Revenue Bond platform. The supplementary information included herein reconciles total University revenue to General Revenue pledged to bondholders. For example, the following items are restricted and, therefore, excluded from General Revenues: a) Appropriations to the University by the State of Washington (State) from the State s General Fund; b) Each fund the purpose of which has been restricted in writing by the terms of the gift or grant under which such fund has been donated, or by the donor thereof; c) Fees imposed upon students as a condition of enrollment at the University, including but not limited to services and activities fees, building fees (Building Fees) and technology fees; and d) Revenues and receipts attributable to the Metro Tract Revenue, which are appropriated to the University by the State. Unrestricted fund balances, to the extent that they were accumulated from money that was received as General Revenues, also are included and available to pay obligations secured by General Revenues. Any interest subsidy received from the federal government with respect to General Revenue Bonds is included and available to pay obligations secured by General Revenues. (2) Invested Funds Distributions and Net Invested Funds Unrealized Gains and Losses These amounts represent the net interest, dividends, and realized gains or losses earned on the Invested Funds that are distributed to departments for operations, in addition to or offset by any unrealized gains and losses on the portfolio. 4

57 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Financial Statements June 30, 2014 (With Independent Auditors Report Thereon)

58 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Table of Contents Page Independent Auditors Report 1 Management s Discussion and Analysis 3 Financial Statements: Statement of Net Position 10 Statement of Revenues, Expenses, and Changes in Net Position 11 Statement of Cash Flows 12 Notes to Financial Statements 14

59 KPMG LLP Suite Eighth Avenue Seattle, WA Independent Auditors Report The Board of Regents University of Washington We have audited the accompanying financial statements of the University of Washington Housing and Food Services, a Department of the University of Washington, which comprise the statement of net position as of June 30, 2014, and the related statements of revenues, expenses, and changes in net position and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. As discussed in note 1 to the financial statements, the financial statements of the University of Washington Housing and Food Services, an auxiliary enterprise within the University of Washington (the University), are intended to present the financial position, the changes in financial position and cash flows of only the respective portion of the business-type activities of the University that is attributable to the transactions of the University of Washington Housing and Food Services. They do not purport to, and do not, present fairly the financial position of the University as of June 30, 2014, the changes in its financial position or its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

60 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Washington Housing and Food Services as of June 30, 2014, and the results of its operations and its cash flows for the year then ended, in accordance with U.S. generally accepted accounting principles. Other Matter U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 3 through 9 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Seattle, Washington November 7,

61 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Management s Discussion and Analysis Unaudited see accompanying auditors report June 30, 2014 Discussion and Analysis Prepared by Management The following discussion and analysis provides an overview of the financial position and activities of the University of Washington Housing and Food Services (HFS) as of and for the years ended June 30, 2014 and This discussion has been prepared by HFS management and should be read in conjunction with the financial statements and accompanying notes, which follow this section. Overview of the Financial Statements The financial statements of HFS include the statement of net position; the statement of revenues, expenses, and changes in net position; the statement of cash flows; and notes to financial statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) principles, which establish standards for external financial reporting for public colleges and universities. The statement of net position presents the financial condition of HFS at the end of the last fiscal year and reports all assets and liabilities. A summarized comparison of HFS s assets, liabilities, and net position is as follows as of : Statement of Net Position Percentage change Assets: Current assets $ 61,174,943 50,689, % Noncurrent assets 377,232, ,800, Total assets $ 438,407, ,490, % Liabilities: Current liabilities $ 25,111,478 28,731,159 (12.6)% Noncurrent liabilities 400,924, ,869, Total liabilities 426,035, ,600, Net position: Net investment in capital assets (19,719,120) (2,061,676) Unrestricted 32,091,102 25,951, Total net position 12,371,982 23,890,001 (48.2) Total liabilities and net position $ 438,407, ,490, % 3

62 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Management s Discussion and Analysis Unaudited see accompanying auditors report June 30, 2014 Current assets consist primarily of cash, accounts receivable, inventory, prepaid expenses, and receivables from other University departments. Current assets were $36.1 million more than current liabilities at June 30, Total current assets increased from $50.7 million at June 30, 2013, to a total of $61.2 million at June 30, The increase was caused by an increase in cash due to an overall increase in residence hall room rents and related food services associated with the new residential housing available this fiscal year. Receivables from other university departments also increased due to a positive year on leases from commercial properties and receipts of energy rebates from construction. Noncurrent assets consist of capital assets of land, buildings, building improvements, equipment, and construction in process. Noncurrent assets were $30.4 million more at June 30, 2014, than at June 30, 2013, mainly due to the construction of additional housing under the Housing Master Plan. Current liabilities consist primarily of accounts payable, accrued interest, accrued expenses, unearned revenue, deposits, due to other University departments, and the current portion of debt payments. Current liabilities decreased by 12.6% to a total of $25.1 million at June 30, 2014, from $28.7 million at June 30, 2013, due primarily to a decrease in payables to other University departments related to the housing construction under the Housing Master Plan. Noncurrent liabilities consist of the long-term portion of Internal Lending Program (ILP) debt. Total long-term debt increased by 16.3% to a total of $400.9 million at June 30, 2014, from $344.9 million at June 30, 2013, due primarily to additional debt incurred to finance the Housing Master Plan. The change in net position or equity measures whether the overall financial condition has improved or deteriorated during the past year. Total net position decreased by 48.2% to a total of $12.4 million at June 30, Although the continued strong demand for campus housing resulted in a positive net operating income, HFS had higher debt interest payments, increased building depreciation and incurred a loss on disposal of Terry Hall, which was demolished to be rebuilt under the Housing Master Plan. In addition, HFS transferred the Mercer Garage to the University s Commuter Services as a capital asset contribution of approximately $2.6 million. Statement of Revenues, Expenses, and Changes in Net Position The changes in total net position, as presented on the statement of net position, are detailed in the activity presented in the statement of revenues, expenses, and changes in net position. This statement presents HFS s results of operations. In accordance with GASB reporting principles, revenue and expenses are classified as operating, nonoperating, or other. In general, operating revenue is revenue received for providing housing, food service, and related services to the students and conference guests. Operating revenue is also received in the form of educational sponsorship, and as vending commissions. Operating expenses are those expenses paid to provide the services and resources, mainly salaries and benefits, cost of food, building depreciation, and administrative overhead. 4

63 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Management s Discussion and Analysis Unaudited see accompanying auditors report June 30, 2014 Nonoperating revenue is that received for which goods and services were not provided. Under GASB reporting principles, investment income and expenses are classified as nonoperating activities. Also included as nonoperating are losses on disposal of capital assets demolished and replaced by new buildings under the Housing Master Plan. The following is a condensed view of the statement of revenues, expenses, and changes in net position for the fiscal years ended : Percentage change Operating revenues $ 100,298,527 83,853, % Operating expenses (87,285,766) (76,009,612) 14.8 Net operating income 13,012,761 7,844, Net nonoperating expense (21,946,780) (18,334,702) 19.7 Capital asset contribution (2,584,000) (5,056,024) (48.9) Change in net position (11,518,019) (15,546,375) 25.9 Net position, beginning of year 23,890,001 39,436, Net position, end of year $ 12,371,982 23,890,001 (48.2)% 5

64 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Management s Discussion and Analysis Unaudited see accompanying auditors report June 30, 2014 Revenues from all Sources The following table summarizes revenues from all sources for the years ended : Residence halls and single-student apartment rent $ 52,313,110 39,892,996 Residence halls and retail food services 36,832,222 34,018,988 Conferences and guest rent 3,600,051 2,934,851 Leases 2,813,768 2,419,018 Family housing rent 2,061,616 1,866,175 Educational sponsorship 806, ,250 Forfeitures and miscellaneous fees 789,700 1,028,741 Vending machines 625, ,893 Laundry 377, ,571 Microfridge commission 6,693 5,731 Energy Rebates 1,472,952 Investment income 1,002, ,393 Other 72,385 82,749 Total revenue all sources $ 102,773,658 84,759,356 The largest revenue source is residence hall and single-student room rent and food services, which comprised 88.9% of operating revenue in 2014, versus 88.1% in Residence hall and single-student rent increased by 31.1%, or $12.4 million, over the prior year. This increase was directly due to a rate increase in 2014 and a net increase in rentable space under the Housing Master Plan. Food service revenue also increased due mainly to the increase in residence hall students. Nonoperating revenue increased by 173.4% due to a $1.5 million receipt of energy rebates from the new building construction energy program. Nonoperating expenses increased by 26.9%, or $5.2 million, over the prior year due to increased debt interest payment and loss on disposal of Terry Hall. Under the Housing Master Plan, Terry Hall is being rebuilt and will open autumn

65 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Management s Discussion and Analysis Unaudited see accompanying auditors report June 30, 2014 Expenses and Expense Transfers The following table summarizes expenses and expense transfers for the years ended : Salaries and related benefits $ 24,274,588 22,577,811 Depreciation 16,074,790 10,199,858 Cost of food and merchandise 14,362,105 13,284,132 Non capitalized equipment 8,500,845 8,372,494 Utilities 6,587,079 5,509,775 Indirect expenses 6,407,093 6,445,361 Contract services 4,004,652 3,192,662 Supplies 2,921,768 2,675,814 Repairs and maintenance 2,454,095 2,020,016 Institutional overhead 1,349,043 1,386,913 Interest expense on capital asset-related debt 16,761,966 12,661,669 Loss on capital asset disposals and transfers 6,512,296 5,079,527 Financing cost 1,147,649 1,498,899 Capital asset contribution to other University 2,584,000 5,056,024 Other 349, ,776 Total expenses and expense transfers $ 114,291, ,305,731 Salaries and benefits expense increased by 7.5%, or $1.7 million, over the prior year due mainly to rate increases and to increased housing and food operation with Mercer Hall placed in service in fiscal year Depreciation expense increased by 57.6%, or $5.9 million, over the prior year due to depreciation of new residential buildings. Cost of food and merchandise increased by 8.1%, or $1.1 million, over the prior year due to an increase in residence hall and retail food services revenues of a comparable 8.3%. Cost of food was 39.0% of total food service revenue for both 2014 and A capital asset contribution resulted from a transfer of the parking garage located in Mercer Court to another University Department, Commuter Services, during fiscal year 2014 at a net book value of $2,584,000. Economic Factors and Significant Events Housing Operation Autumn quarter 2014 will open at 112.2% occupancy of as-built capacity with approximately 75 students in temporary lounge space and 155 students on the waiting list. To meet excess student demand in , over 160 triples were added to our housing inventory. UW Real Estate managed off-campus facilities are showing similar strength in demand. 7

66 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Management s Discussion and Analysis Unaudited see accompanying auditors report June 30, 2014 The new five-building Mercer Court facility opened in autumn 2013 and increased inventory by over 1,300 beds in both 9-and 12-month housing options. Terry Hall was closed for demolition at the end of autumn quarter 2013 as part of the phase 3 master plan. Students displaced by the demolition of Terry Hall were relocated to Lander Hall, which opened to students at the beginning of winter quarter Updates to the Housing Master Plan Phase 1, which consisted of four new buildings, was completed as of September Poplar Residence Hall and Cedar Apartments were opened on September 2011 and Alder and Elm Residence Halls opened in September Phase 2, which consisted of two properties, was completed in January Mercer Court opened on schedule in autumn 2013 and Lander Residence Hall opened in January In June 2012, the Board of Regents approved borrowing under the ILP for up to $142.3 million for Phase 3. Phase 3 includes the demolition of Terry Hall and the construction of two new residence halls, Maple and New Terry. With less than a year to completion, Phase 3 is progressing as scheduled with the demolition of Terry Hall complete and the construction of New Terry Hall and Maple Hall underway. The opening of New Terry Hall and Maple Hall in autumn 2015 will complete Phase 3 and the west campus development phase of the Housing Master Plan. Net bed space will have increased by approximately 2,450. The planning process for Phase 4 of the Housing Master Plan began in summer 2014 and has been approved. This phase focuses on north campus will include the demolition and replacement of Haggett Hall and McCarty Hall as well as the construction of three new halls surrounding Denny Field. It is anticipated that McMahon Hall will be demolished and returned to the University to be developed as needed. Phase 4 financing and pro formas are currently being vetted through UW Treasury Office and will be presented to the Board of Regents in March 2015 for final approval. Debt service is being paid to the ILP for all Phase 1 and 2 buildings. Debt service on Phase 3 for the New Terry and Maple Halls is scheduled to begin October The debt service ratio for fiscal year 2014 is Dining Operation Phase 2 of the Housing Master Plan introduced Local Point in Lander Residence Hall and Husky Grind Café in Mercer Court. Local Point is the replacement dining option for Eleven 01, which was demolished with Terry Residence Hall during winter and spring quarter of Sales for Eleven 01 continued to be negatively impacted by physical difficulty of getting past the adjacent construction of Lander Hall in the first half of the year. Due to the ongoing construction of New Terry and Maple Halls, Local Point operated under capacity in and brought in less revenue than projected. When New Terry and Maple Halls open in autumn 2015, an additional 1,100 beds will be added to west campus. Sales for north campus dining facility, McMahon8 exceeded budget in

67 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Management s Discussion and Analysis Unaudited see accompanying auditors report June 30, 2014 The new Husky Grind Café at Mercer Court, opened in autumn 2013, expands the offerings of the in-house roasted coffee brand, Husky Grind Coffee and brings the coffee brand exclusively to a total of four retail locations across campus. These locations include the District Market, Cultivate, and the Parnassus Café. Coffee sales and their related transaction counts have continued to grow quarter to quarter over the last two fiscal years at these locations. In autumn 2013, HFS opened Microscopic Market, a new convenience store in South Lake Union as a response to requests from the Medical Center and the opening of new buildings in that area. While sales were far less than anticipated, HFS was made whole for $73,000 of losses as a result of a MOU with the Medical Center. The express markets produced net income of $1,357,000 during the fiscal year 82% more than their budgeted target. While the Nook and Ian s Domain continued to do well, it was the growing popularity of the District Market, which contributed $875,000 to this total. Retail cafés, markets, and mobile dining units far exceeded anticipated budgeted net operating income in by $373,000. Due to lackluster sales in resulting from the HUB closure, projected retail sales were very conservative. In addition to exceeding budgeted revenue, the retail and remote locations realized cost savings in labor, utilities, and direct expenses. Fiscal year 2014 marked the beginning of the institutional-level Starbucks and Coca-Cola sponsorship agreements. All non-husky Grind locations were converted to the Starbucks model including signage, equipment, product, and pricing. Other changes resulting from the Starbucks agreement include the closing of Padelford Espresso, serving Green Mountain coffee, and Freshens in the Husky Den. Suzzallo Library in Red Square, current home of Suzzallo Café, will be the site of the first Starbucks licensed store, which is tentatively scheduled to open in autumn The addition of the licensed store requires an initial capital outlay of an estimated $1,000,000. Over the course of the ten-year sponsorship agreement, the University will be opening an additional four licensed stores. Changes to the NCAA rules regarding athlete nutrition have altered the operational model of Conibear beginning in autumn Conibear will be staffed and equipped to provide proper service to the expanded meal schedule as well as the anticipated increase in athlete participation. Food service will also be offered off-site for the football team during morning practices. 9

68 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Statement of Net Position June 30, 2014 Assets Current assets: Cash and cash equivalents in the University of Washington Invested Funds Pool $ 53,045,099 Accounts receivable, net 1,271,372 Inventory 978,089 Other current assets 267,494 Due from other University departments 5,612,889 Total current assets 61,174,943 Noncurrent assets: Capital assets, less accumulated depreciation (note 3) 377,232,789 Total assets $ 438,407,732 Liabilities and Net Position Current liabilities: Accounts payable $ 2,539,491 Accrued interest 1,379,190 Other accrued expenses 2,139,079 Unearned revenue 5,277,012 Deposits 3,922,165 Due to other University departments 1,611,888 Internal lending program payable, current portion (notes 2 and 5) 7,917,653 Lease payable, current portion (notes 2 and 4) 325,000 Total current liabilities 25,111,478 Noncurrent liabilities: Internal lending program payable, less current portion (notes 2 and 5) 398,149,272 Lease payable, less current portion (note 4) 2,775,000 Total noncurrent liabilities 400,924,272 Total liabilities 426,035,750 Net position: Net investment in capital assets (19,719,120) Unrestricted 32,091,102 Total net position 12,371,982 Total liabilities and net position $ 438,407,732 See accompanying notes to financial statements. 10

69 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Statement of Revenues, Expenses, and Changes in Net Position Year ended June 30, 2014 Operating revenues: Residence halls and single-student apartment rent $ 52,313,110 Residence halls and retail food services 36,832,222 Conferences and guest rent 3,600,051 Leases 2,813,768 Family housing rent 2,061,616 Educational sponsorship 806,611 Forfeitures and miscellaneous fees 789,700 Vending machines 625,143 Laundry 377,228 Microfridge commission 6,693 Other 72,385 Total operating revenues 100,298,527 Operating expenses: Salaries and related benefits 24,274,588 Depreciation 16,074,790 Cost of food and merchandise 14,362,105 Noncapitalized equipment 8,500,845 Utilities 6,587,079 Indirect expenses 6,407,093 Contract services 4,004,652 Supplies 2,921,768 Repairs and maintenance 2,454,095 Institutional overhead 1,349,043 Other 349,708 Total operating expenses 87,285,766 Net operating income 13,012,761 Nonoperating revenue (expense): Energy rebates 1,472,952 Investment income 1,002,179 Interest expense on capital asset-related debt (16,761,966) Loss on capital asset disposals and transfers (6,512,296) Financing cost (1,147,649) Total nonoperating expense (21,946,780) Capital asset contribution to other University department (2,584,000) Change in net position (11,518,019) Net position, beginning of year 23,890,001 Net position, end of year $ 12,371,982 See accompanying notes to financial statements. 11

70 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Statement of Cash Flows Year ended June 30, 2014 Cash flows from operating activities: Cash received from student housing fees $ 54,657,583 Cash received from residence hall food services 36,941,169 Cash received from conference services 4,347,904 Cash received from leases 1,787,231 Cash received from facility rentals 1,626,922 Cash received from vending commissions 640,602 Cash received from educational sponsorship 524,840 Cash received from others 75,095 Cash received for interfund and debit card activities 96,090 Cash paid to suppliers (40,190,938) Cash paid for employee salaries, wages, and benefits (24,236,434) Cash paid for indirect expenses (7,367,066) Net cash flows provided by operating activities 28,902,998 Cash flows from capital and related financing activities: Purchases of capital assets (58,838,283) Borrowing on internal lending program 64,424,120 Interest paid on capital debt (20,215,676) Principal payments on capital debt (6,687,225) Financing cost paid on capital debt (1,147,649) Net cash flows used in capital and related financing activities (22,464,713) Cash flow from investing activity: Interest received 984,094 Net change in cash and cash equivalents 7,422,379 Cash and cash equivalents, beginning of year 45,622,720 Cash and cash equivalents, end of year $ 53,045,099 See accompanying notes to financial statements. 12 (Continued)

71 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Statement of Cash Flows Year ended June 30, 2014 Reconciliation of operating income to net cash flows from operating activities: Operating income $ 13,012,761 Adjustments to reconcile operating income to net cash flows provided by operating activities: Depreciation 16,074,790 Change in operating assets and liabilities: Accounts receivable (320,421) Prepaid expenses and other (57,256) Inventory (145,393) Due to/from other University departments (684,977) Accounts payable (744,331) Unearned revenue 1,275,012 Accrued expenses 39,513 Deposits 453,300 Net cash flows provided by operating activities $ 28,902,998 Supplemental disclosures for cash flow information: Capitalized interest $ 3,887,120 Amortization of deferred premium on refunded bonds 66,480 Capital asset contribution to other University department 2,584,000 Loss on disposal of capital asset 6,512,296 See accompanying notes to financial statements. 13

72 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 (1) Organization and Significant Accounting Policies (a) Organization The University of Washington Housing and Food Services (HFS) operates food services, residence halls, and apartment complexes both on and off the University of Washington (the University) campus. The operations of HFS as an auxiliary enterprise support the University's mission by providing safe, convenient, and affordable housing as well as programs that promote personal development. In addition, HFS provides conference facilities and catering services to various organizations. The University provides certain administrative services to HFS. (b) Basis of Accounting The financial statements have been prepared in accordance with generally accepted accounting principles. The statements are presented using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenue is recognized when earned, and expenses are recorded when an obligation has been incurred. On July 1, 2013, HFS adopted GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. This Statement reclassifies as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities. A deferred outflow (inflow) is a consumption (acquisition) of net position applicable to future reporting periods. In compliance with GASB No. 65, beginning net position has been adjusted at July 1, With the adoption of GASB No. 65, net position was adjusted as of July 1, 2013 and debt issuance costs are now expensed instead of amortized. Below is a reconciliation of total net position at July 1, 2013, to the adjusted net position: Net position at July 1, 2013 $ 25,388,900 Adoption of GASB No. 65 (1,498,899) Net position at July 1, 2013, as adjusted 23,890,001 In June 2012, the GASB approved Statement No. 68, Accounting and Financial Reporting for Pensions, which will take effect in the fiscal year ending June 30, This Statement requires governments providing defined benefit pensions to their employees to recognize their long-term obligation for pension benefits as a liability for the first time, along with the associated assets which have been set aside to fund the plan. Since the University participates in several cost sharing pension plans which are administered by the state of Washington Department of Retirement Systems (DRS), this statement will require the University to recognize its proportionate share of the state-wide net pension liability for each of the plans in which it participates. The Statement also eliminates the method of amortizing the liability balances over several years, and instead requires full recognition of the net liability upon implementation. The requirement of GASB Statement No. 68 to record a proportionate share of retirement plan unfunded pension liabilities may negatively impact the 14 (Continued)

73 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 University s future unrestricted net position. The University is currently analyzing the impact of this Statement. (c) Cash and Cash Equivalents in the University of Washington Invested Funds Pool All of the HFS s cash and cash equivalents are invested in the University of Washington s Invested Funds Pool. The following information is for the entire pool and are audited disclosures as a part of the University of Washington audit. The Board of Regents of the University of Washington is responsible for the management of the University s investments. The Board establishes investment policy, which is carried out by the Chief Investment Officer. The University of Washington Investment Committee, comprising Board members and investment professionals, advises on matters relating to the management of the University s investment portfolios. The composition of the carrying amounts of investments by type at June 30, 2014 is listed below. University Investments Investment type Carrying value 2014 (Dollars in thousands) Cash equivalents $ 16,957 Fixed income 1,972,553 Equity 1,672,262 Nonmarketable alternatives 349,778 Absolute return 509,476 Real assets 219,069 Miscellaneous 4,724 Total investments $ 4,744,819 Investment Pools The University combines most short-term cash balances into the Invested Funds Pool. At June 30, 2014, the Invested Funds Pool totaled $1,606,152,000. The Invested Funds Pool also owns units in the Consolidated Endowment Fund valued at $668,863,000 on June 30, By University policy, departments with qualifying funds in the Invested Funds Pool receive distributions based on their average balances and on the type of balance. Campus depositors received 2% in fiscal year Endowment operating and gift accounts received 3% in fiscal year The difference between the actual earnings of the Invested Funds Pool and the calculated distributions is used to support activities benefiting all University departments. The majority of the endowed funds are invested in a pooled fund called the Consolidated Endowment Fund (CEF). Individual endowments purchase units in the pool on the basis of a per unit valuation of the CEF at fair value on the last business day of the calendar quarter. Income is distributed based on the number of units held. RCW of the Washington State Code and the 15 (Continued)

74 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 Uniform Prudent Management of Institutional Funds Act allow for total return expenditure under comprehensive prudent standards. Interest Rate Risk The University manages interest rate risk through its investment policies and the investment guidelines established with each manager. Each fixed income manager is assigned a maximum boundary for duration as compared to the manager s relevant benchmark index. The goal is to allow ample freedom for the manager to perform, while controlling the interest rate risk in the portfolio. The weighted average effective duration of the University s fixed income portfolio was 1.91 years at June 30, Credit Risk Fixed income securities are subject to credit risk, which is the risk that the issuer or other counterparty to a financial instrument will not fulfill its obligations, or that negative perceptions of the issuer s ability to make these payments will cause prices to decline. Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The University Investment Policies limit fixed income exposure to investment grade assets. The Investment Policy for the Invested Funds cash pool requires each manager to maintain an average quality rating of AA as issued by a nationally recognized rating organization. The Invested Funds liquidity pool requires each manager to maintain an average quality rating of A and to hold 25% of their portfolios in government and government agency issues. The Investment Policy for the CEF reflects its long-term nature by specifying average quality rating levels by individual manager, but still restricting investment to investment grade credits. Duration and credit risk figures at June 30, 2014 exclude $49,348,000 of fixed income securities held outside the CEF and the Invested Funds Pool. This amount makes up 2.48% of the University s fixed income investments (including cash equivalents), and is not included in the duration figures detailed in the following table. The composition of the fixed income securities at June 30, 2014, along with credit quality and effective duration measures is summarized below: Fixed Income: Credit Quality and Effective Duration Investment Noninvestment Not Duration Investments U.S. government grade* grade rated Total (in years) (Dollars in thousands) 2014: U.S. Treasuries $ 877, , U.S. government agency 597, , Mortgage backed 103,105 93, , Asset backed 178,075 8,495 1, , Corporate and other 79, , Total $ 1,475, , ,933 1,281 1,940, * Investment grade securities are those that are rated BBB and higher by Standard and Poor s or Baa and higher by Moody s. 16 (Continued)

75 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 Foreign Currency Risk The University s Investment Policies permit investments in international equity and other asset classes which can include foreign currency exposure. The University held non-u.s. denominated securities at June 30, 2014 of $1,029,318,000. Investments Denominated in Foreign Currency June (Dollars in thousands) Euro (EUR) $ 156,509 Chinese Renminbi (RMB) 126,848 Indian Rupee (INR) 100,451 Japanese Yen (JPY) 65,017 Brazilian Real (BRL) 56,611 Russian Ruble (RUB) 56,517 British Pound (GBP) 54,281 Hong Kong Dollar (HKD) 50,663 South Korean Won (KRW) 49,150 Canadian Dollar (CAD) 41,888 Swiss Franc (CHF) 39,900 Taiwanese Dollar (TWD) 30,894 Philippine Peso (PHP) 18,974 Indonesian Rupiah (IDR) 14,732 Remaining currencies 166,883 Total $ 1,029,318 (d) (e) (f) Accounts Receivable HFS has established an allowance for doubtful accounts to allow for those receivables which are estimated to be uncollectible. The allowance is based on historical collection rates. Student accounts are considered past due if they are unpaid for 30 days after the due date. Other customer accounts are considered past due if they are unpaid for 60 days after the due date. When an account is deemed uncollectible, it is generally written off against the allowance. The balance of the allowance account was $41,185 at June 30, Inventory Inventory, consisting primarily of food, is stated at the lower of cost (first-in, first-out method) or market. Capital Assets Buildings, building improvements, and equipment are stated at cost. Additions, replacements, major repairs, and renovations are capitalized. Depreciation is computed using the straight-line method 17 (Continued)

76 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 over the estimated useful lives of the assets, generally 10 to 50 years for building components, 20 to 50 years for infrastructure and land improvements, and 4 to 13 years for equipment. Expenditures for noncapitalized equipment and repairs that represent normal replacement of such equipment and routine maintenance of the buildings are expensed as incurred, as are furniture, fixtures, or equipment for newly constructed buildings individually that do not meet the criteria described below. Building and improvements are capitalized if they result in additional asset services (i.e., expanded facilities), result in more valuable asset services (i.e., upgraded facilities), or extend normal service life. Expenditures are not capitalized if they are incurred to maintain assets in good operating condition, and/or do not meet the criteria for capitalization stated above. Equipment with a cost of $2,000 and above is generally capitalized if it benefits more than one operating cycle. HFS developed a Comprehensive Housing Master Plan to develop residence halls and single-student apartments in four phases. The development of these residence halls creates a richer on-campus community, alleviating the currently overcrowded conditions within student housing, and provide additional bed capacity (surge space) to support renovation of existing residence halls. This additional capacity permits HFS to renovate existing facilities while continuing to meet current housing demand. As of June 30, 2014, costs incurred related to the Housing Master Plan are approximately $360 million. These costs were recorded in construction in process and completed building costs at June 30, Total projected cost of the Housing Master Plan is $489.9 million, which will be funded by borrowing under the ILP (see note 5). The Board of Regents has approved borrowing under the ILP of up to $523.4 million for three of the four phases of the Housing Master Plan as of June 30, Interest expense is capitalized during the time a project is under construction and begins upon the issuance of debt to finance the construction of a capital asset. Capitalized construction-related interest was $3.9 million during (g) (h) (i) Unearned Revenue Unearned revenue consists of prepaid food sales, room rent, and conference revenue. Deposits Deposits consist of a required $500 per student housing damage deposit that is refundable when the student vacates (presuming no damage resulted during the student s tenure in the housing unit). Net Position Net position consists of the following components: Net investment in capital assets This component consists of capital assets, net of accumulated depreciation, reduced by the net outstanding debt balances related to capital assets, net of unamortized debt expenses. The negative balance at June 30, 2014 is due to the inclusion of existing debt on the old Mercer, Lander, and Terry Halls, all of which were demolished as of fiscal year 2014, while additional debt was incurred for the demolition and redevelopment. 18 (Continued)

77 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 Unrestricted This component consists of assets and liabilities that do not meet the definition of net investment in capital assets. (j) (k) (l) (m) (n) Operating and Nonoperating Revenue and Expenses In general, operating revenue is revenue received for providing housing, dining, and related services to the customers of HFS, the majority of which consists of room and board services to students. Revenue is recognized as the food service is provided, the appropriate rental period occurs, or the conference takes place. Operating expenses are those expenses paid to provide the services and resources, mainly consisting of the cost of food, salaries and benefits, utilities, building maintenance, and administrative overhead expenses. Under applicable accounting principles, special items such as soil contamination remediation expenses related to the Housing Master Plan project are also reported as operating expenses. In fiscal year 2014, HFS incurred remediation expenses of $1,043,423, related to the Terry Hall redevelopment. These expenses are included in the noncapitalized equipment in the accompanying statement of revenues, expenses, and changes in net position. Nonoperating revenue is recognized for receipts under the energy rebate program applied from the Master plan constructions. Nonoperating expense included a loss for the disposal of Terry Hall building due to its demolition. Institutional Overhead The University allocates certain general and administrative charges to those departments for which services are performed. This institutional overhead charge, which is based on a percent of division revenue, amounted to $1,349,043 during the year ended June 30, Indirect Expenses Administrative expenses such as salaries and benefits, contract services, and supplies are reported as indirect expense. These allocations to HFS amounted to $6,407,093 for the year ended June 30, Capital Asset Contribution to Other University Department During fiscal year 2014, HFS made a capital asset contribution by transferring a parking garage located in Mercer Court to Commuter Services (another department at the University of Washington) as mitigation for the lost parking lots for the new constructions. The net book value of the capital asset contribution amounted to $2,584,000. Income Taxes As a part of the University, the operations of HFS are exempt from federal income taxes, except to the extent of unrelated business income. HFS did not incur unrelated business income tax during 2014 and, accordingly, the financial statements do not include a provision for federal income taxes. 19 (Continued)

78 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 (o) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (2) Noncurrent Liabilities Noncurrent liability activity for the year ended June 30, 2014 is summarized as follows: Balance at Balance at June 30, 2013 Additions Reductions June 30, 2014 Noncurrent liabilities: ILP payable $ 348,039,843 64,424,120 (6,397,038) 406,066,925 Lease payable 3,410,000 (310,000) 3,100,000 Total noncurrent liabilities 351,449,843 $ 64,424,120 (6,707,038) 409,166,925 Current portion (6,580,825) (8,242,653) Noncurrent portion $ 344,869, ,924, (Continued)

79 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 (3) Capital Assets Capital asset activity for the year ended June 30, 2014 is summarized as follows: Balance at Additions/ Retirements/ Balance at June 30, 2013 transfers transfers June 30, 2014 Capital assets, not being depreciated: Land $ 6,775,215 6,775,215 Construction in progress 134,561,812 54,747,121 (164,436,103) 24,872,830 Total capital assets not being depreciated 141,337,027 54,747,121 (164,436,103) 31,648,045 Capital assets, being depreciated: Building and building improvements 273,696, ,436,103 (18,215,587) 419,916,767 Equipment 5,081, ,963 (306,601) 5,631,108 Total capital assets being depreciated 278,777, ,292,066 (18,522,188) 425,547,875 Less accumulated depreciation: Building and building improvements 69,784,726 15,476,958 (9,121,859) 76,139,825 Equipment 3,529, ,832 (304,033) 3,823,306 Total accumulated depreciation 73,314,233 16,074,790 (9,425,892) 79,963,131 Capital assets, net $ 346,800, ,964,397 (173,532,399) 377,232,789 (4) Leases Lease Payments In June 2001, the State of Washington, in conjunction with the Washington Finance Officers Association (a nonprofit corporation), issued Certificates of Participation (CoPs) to certain investors. The proceeds from the CoPs were used for improvements to food services at the HUB. The University has agreed to make certain payments (considered lease payments) as required by the CoPs and HFS has agreed to reimburse the University for these payments. 21 (Continued)

80 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 At June 30, 2014, the total principal amount of obligation under this agreement was $3,100,000. It is expected to be repaid in installments of approximately $480,000 (including imputed interest of approximately 5%) per year through Following is a summary of minimum payments under this agreement (principal and interest) for the years ending June 30: Principal Interest Total 2015 $ 325, , , , , , , , , , , , ,000 89, , ,310, ,912 1,449,912 $ 3,100, ,863 3,866,863 Lease Revenue The University and Community Development Properties (CDP), a nonprofit organization, entered into a lease agreement whereby CDP issued bonds to undertake a comprehensive redevelopment of the Commodore Duchess, Radford Court, and Nordheim Court properties, mainly for student housing. In July 2011 and 2012, the University took over the Commodore Duchess, Radford Court, and Nordheim Court properties (the Apartments) and refunded the CDP bonds with loan proceeds from the Internal Lending Program (ILP). In accordance with the ILP financing agreement, HFS will be obligated to pay debt service on this loan only in the event that funds from the Apartments are insufficient. The Apartments have been self-sustaining in past years. The Apartments are owned by the University and are managed by University of Washington Real Estate (UWRE) with an outside property manager. As of June 30, 2014, the outstanding debt under this agreement was $66,169,666. The University receives an annual payment from the Apartments, which it designates to HFS. Revenue from these properties was $2,813,768 for the year ended June 30, (5) The Internal Lending Program Effective July 1, 2008, the University Board of Regents adopted the amended Debt Management Policy: Statement of Objectives and Policies to provide for the implementation of an ILP. The purpose of the ILP is to lower the University s overall cost of capital and provide internal borrowing units with a stable and predictable borrowing rate. The ILP will make loans to internal borrowers at a uniform internal lending rate. These loans will be funded through the issuance of University General Revenue bonds and notes. ILP program policies include a provision for a rate of stabilization reserve and a provision for rate adjustments, if necessary. On April 22, 2008, the University issued General Revenue Refunding Bonds (2008 Bonds) to refund certain outstanding bonds of the University. A portion of the proceeds from the sale of the 2008 Bonds was 22 (Continued)

81 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 used for the purpose of refunding HFS s 1996 junior lien revenue bonds with a premium. HFS is obligated to the ILP in the amount of $15,893,750 as of June 30, The final payment is due in the fiscal year ending The interest rate ranges between 3% and 5%. The balance of the premium was $422,840 as of June 30, In December 2008, HFS drew funds from the ILP in a total amount of $6,348,067 for the purchase of a piece of property called the Cavalier Apartments for future housing development plans. The final payment is due in the fiscal year ending The annual interest rate is 5.5%, which is reviewed annually and is subject to adjustment. HFS is obligated to the ILP in the amount of $5,601,373 as of June 30, In October 2010, the University issued General Revenue & Refunding Bonds, 2010A & B. A portion of the proceeds was used to partially refund the 2002 Housing and Dining Revenue & Refunding Bonds with a premium. HFS is obligated to the ILP in the amount of $8,562,496 as of June 30, The final payment is due in the fiscal year ending The interest rate ranges between 3.3% and 4.1%. The balance of the premium was $108,979 as of June 30, In March 2012, the University issued General Revenue & Refunding Bonds, 2012A. A portion of the proceeds was used to fully refund the 2002 and 2004 Housing and Dining Revenue & Refunding Bonds. The amount refunded was $15,595,000 with no gain or loss. HFS is obligated to the ILP in the amount of $12,034,472 as of June 30, The final payment is due in the fiscal year ending The average interest rate is 3.7%. From May 2009 through June 2012, the Board of Regents approved borrowing for HFS under the ILP of up to $523.4 million for three of the four phases of the Housing Master Plan to build residence halls and single student apartments. The total draws to fund the project as of June 30, 2014, has amounted to approximately $369 million and HFS has made principal payments beginning October 2011 for Phase 1 and 2. Principal payments for Phase 3 will begin in October HFS is obligated to the ILP in the amount of $363,443,015 as of June 30, The final payments are due in the fiscal years ending 2041 and The interest rate is 5.5%, which is reviewed annually and is subject to adjustment. The ILP agreements require HFS to maintain certain financial performance ratios. If these requirements were violated, future financing for the ILP can be ceased or minimized. As of June 30, 2014, HFS met all these requirements. 23 (Continued)

82 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 The following is a summary of future payments (principal and interest) to be paid to the University to cover the debt service payments for the years ending June 30: Principal Interest Total 2015 $ 7,917,653 19,926,692 27,844, ,760,021 21,169,146 29,929, ,325,770 21,026,476 30,352, ,820,360 20,528,824 30,349, ,336,063 20,011,198 30,347, ,743,065 91,301, ,044, ,156,210 76,575, ,732, ,020,273 58,790, ,810, ,862,842 37,068, ,931, ,051,483 10,598,176 96,649, ,541,366 15,110 1,556,476 Add unamortized premium 531, ,535,106 $ 377,011, ,546,592 $ 406,066,925 (6) Pension Plan The University offers two contributory plans in which Department employees can participate: the Washington State Public Employees Retirement System (PERS) plan, a defined-benefit retirement plan; and, the University of Washington Retirement Plan (UWRP), a defined-contribution plan with supplemental payment, when required. The Department s employees participate in the PERS, UWRP, and Other Postemployment Benefits (OPEB). The Department is allocated a cost for the participation of these plans. The cost is included in the benefits load rate set by the University in calculating its fringe benefit expense and is applied on a per-employee basis and is not significant dollar amount. (a) Public Employees Retirement System Plan Description The University contributes to PERS, a cost sharing multiple employer defined-benefit pension plan administered by the State of Washington Department of Retirement Systems. PERS Plan 1 provides retirement and disability benefits and minimum benefit increases beginning at age 66 to eligible nonacademic plan members hired prior to October 1, PERS Plans 2 and 3 provide retirement and disability benefits and a cost of living allowance to eligible nonacademic plan members hired on or after October 1, In addition, PERS Plan 3 has a defined-contribution component, which is fully funded by employee contributions. The authority to establish and amend benefit provisions resides with the legislature. The PERS issues a publicly available financial report that includes financial statements and required supplementary information for PERS. The report may be obtained 24 (Continued)

83 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 by writing to the Department of Retirement Systems, P.O. Box 48380, Olympia, Washington , or visiting Funding Policy The Office of the State Actuary, using funding methods prescribed by statute, determines actuarially required contribution rates for PERS. Plan 1 members are required to contribute 6% of their annual covered salary. Contributions for Plan 2 members are determined by the aggregate method and may vary over time. The contribution rate for Plan 2 employees at June 30, 2014 was 4.9%. PERS 3 members can choose contributions ranging from 5% to 15% of salary, based on the age of the member. The defined-contribution benefit for PERS 3 will depend on the member s contributions, the investment earnings on those contributions, and if an annuity is taken, the age at which the member receives payment. The blended contribution rate for the University at June 30, 2014 for each of PERS Plans 1, 2, and 3 was 9.2%. HFS s contributions to PERS for the year ended June 30, 2014 was $1,063,055, which was equal to the annual required contributions (ARC) for the year. (b) University of Washington Retirement Plan Plan Description Professional staff and certain other salaried employees are eligible to participate in the UWRP, a defined-contribution plan administered by the University. Contributions to the plan are invested in annuity contracts or mutual fund accounts offered by one or more fund sponsors. Employees have at all times a 100% vested interest in their accumulations. Benefits from fund sponsors are available upon separation or retirement at the member s option. RCW 28.B et. seq. assigns the authority to the Board of Regents to establish and amend benefit provisions. The plan has a supplemental payment component that guarantees a minimum retirement benefit based upon a one-time calculation at each employee s retirement date. The University makes direct payments to qualifying retirees when the retirement benefits provided by the fund sponsors do not meet the benefit goals. Funding Policy Employee contribution rates, based on age, are 5%, 7.5%, or 10% of salary. The University matches the contributions of employees. Within parameters established by the legislature, contribution requirements may be established or amended by the Board of Regents. Employee and employer contributions for the year ended June 30, 2014 were $515,264. The supplemental component of the UWRP is financed on a pay-as-you-go basis. 25 (Continued)

84 UNIVERSITY OF WASHINGTON HOUSING AND FOOD SERVICES (A Department of University of Washington) Notes to Financial Statements June 30, 2014 (7) Other Postemployment Benefits (OPEB) The University funds OPEB obligations at a university-wide level on a pay-as-you-go basis. Disclosure information, as required under GASB Statement No. 45 (GASB 45), Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, does not exist at the Department level, and as a result, the Actuarial Accrued Liability (AAL) is not available for auxiliary entities. The University is ultimately responsible for the obligation; therefore, the (ARC) is not recorded on the Department s financial statements. 26

85 STUDENT ACTIVITIES AND FACILITIES FEES SEATTLE CAMPUS ADMINISTERED BY THE DIVISION OF STUDENT LIFE OF THE UNIVERSITY OF WASHINGTON FINANCIAL REPORT JUNE 30, fs Revised: 10/21/2014 2:59 PM csk

86 C O N T E N T S Page INDEPENDENT AUDITORS' REPORT... 1 and 2 FINANCIAL STATEMENTS STATEMENTS OF CASH RECEIPTS, CASH DISBURSEMENTS, AND CHANGES IN CASH BALANCES... 3 NOTES TO FINANCIAL STATEMENTS fs Revised: 10/21/2014 2:59 PM csk

87 INDEPENDENT AUDITORS' REPORT To the Board of Regents University of Washington Seattle, Washington We have audited the accompanying statements of cash receipts, cash disbursements, and changes in cash balances of Student Activities and Facilities Fees Seattle Campus administered by the Division of Student Life of the University of Washington for the years ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the cash basis of accounting described in Note 1; this includes determining that the cash basis of accounting is an acceptable basis for the preparation of the financial statements in the circumstances. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the audit considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 601 Union Street Suite 2300 Seattle, WA (206) MAIN (206) FAX 1 pscpa.com

88 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the cash receipts, cash disbursements, and changes in cash balances of the Student Activities and Facilities Fees Seattle Campus administered by the Division of Student Life of the University of Washington for the years ended, on the cash basis of accounting described in Note 1. Change in Reporting Entity As discussed in Note 1 to the financial statements, the SAF Committee Expenditure Fund was included in these financial statements, which was reflected in the beginning cash balance for the year ended June 30, Our opinion is not modified with respect to that matter. Basis of Accounting We draw attention to Note 1 of the financial statements, which describes the basis of accounting. These statements are prepared on the cash basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States. Our opinion is not modified with respect to that matter. October 15,

89 STUDENT ACTIVITIES AND FACILITIES FEES SEATTLE CAMPUS ADMINISTERED BY THE DIVISION OF STUDENT LIFE OF THE UNIVERSITY OF WASHINGTON STATEMENTS OF CASH RECEIPTS, CASH DISBURSEMENTS, AND CHANGES IN CASH BALANCES For the Years Ended Cash Receipts Student activities and facilities fees - Seattle campus $ 28,552,055 $ 27,372,940 Interest income 382, ,898 Total cash receipts 28,934,372 27,685,838 Debt Service Principal - Bonds (1,490,417) (1,435,417) Principal - Internal Lending Program (1,636,526) (1,253,621) Interest - Bonds (1,933,000) (1,986,540) Interest - Internal Lending Program (6,279,331) (5,109,925) Total debt service payments (11,339,274) (9,785,503) Cash receipts available after debt service 17,595,098 17,900,335 Other Cash Disbursements Hall Health Center 6,475,060 6,243,148 Recreational Sports Operations 2,041,053 2,036,352 Childcare Programs/Office 1,413,369 1,379,924 Associated Students of the University of Washington 822, ,756 Program Lost Revenue - Housing and Food Services 128,044 Ethnic Cultural Center and Theatre Complex 651, ,256 Student Activities and Union Facilities 725, ,616 Student Counseling Center 493, ,167 Graduate and Professional Student Senate 381, ,000 Campus Sustainability Fund 333, ,000 Student Publications 266, ,614 Q-Center 247, ,576 Student Legal Services 171, ,904 Classroom Support Services 100,000 87,164 Services and Activities Committee Operations 28,034 19,644 Peer Health Education Group 23,273 D-Center 37,673 37,672 Total other cash disbursements 14,212,952 13,721,837 Cash Receipts in Excess of Other Cash Disbursements 3,382,146 4,178,498 Other Transfers (692,176) 692,176 Change in cash balances 2,689,970 4,870,674 Cash Balance, beginning of year 18,064,634 13,193,960 Cash Balance, end of year $ 20,754,604 $ 18,064,634 See Notes to Financial Statements fs Revised: 10/21/2014 2:59 PM csk

90 NOTES TO FINANCIAL STATEMENTS Note 1. Organization and Significant Accounting Policies Organization The Division of Student Life ("Student Life") is a unit within the University of Washington ("the University") and is responsible for a variety of programs, services, facilities, and operations supporting the student experience on campus, including housing, food services, recreational sports programs, student government, the Husky Union Building, student conduct, counseling, health & wellness, disability resources, career services, student publications, fraternity and sorority life, the Q-center, ceremonies, and the University s police department. Student Life administers the allocation and expenditure of certain fees collected from students on the Seattle campus called "Student Activities and Facilities Fees." Student Activities and Facilities Fees are a portion of the total fees collected from students. Student Activities and Facilities Fees include Services and Activities Fees, Intramural Bond Fees, and Student Facilities Renovation Fees. The Student Activities and Facilities Fees are first used to pay debt service on current and future bonds and debt obtained from the University s Internal Lending Program ( ILP ), and are then used to support programs recommended by the Services and Activities Fee Committee ( SAF Committee ) and approved by the Board of Regents of the University ("Board of Regents"). The Services and Activities Fees are a student levied, student distributed fees to support and enhance the out-of-class experience of students at the University. The Services and Activities Fees provide ongoing operational and capital funding for programs which protect and enrich the cultural, emotional, intellectual, physical, and social well-being of the student. Each academic quarter, Student Activities and Facilities Fees are charged to full-time and part-time students registered at the University. As a part of the University, Student Activities and Facilities Fee activity is exempt from income taxes and no tax return is filed. Student Activities and Facilities Fee activity receives administrative support from the University without charge. These financial statements only present a selected portion of the activities of the University. As such, they are not intended and do not present either the financial position, results of operations, or changes in net position of the University. Change in Reporting Entity In fiscal year 2014, the reporting entity structure for Student Activities and Facilities Fees was changed to include the SAF Committee Expenditure Fund in the cash balances presented in the Statements of Cash Receipts, Cash Disbursements, and Changes in Cash Balances. The SAF Committee Expenditure Fund is a capital allocation reserve fund comprised of student services and activities fees set aside for subsequent allocation to capital projects as recommended by the SAF Committee and approved by the Board of Regents. This budget unit was included in the reporting entity to more closely reflect student activities and facilities fees which remain under the oversight and control of the SAF Committee. Accordingly, the 2013 financial statements have been restated to reflect the change in reporting entity, and $791,906 is now included in the cash balance at July 1, The restatement had no effect on the change in the cash balance for the year ended June 30, fs Revised: 10/21/2014 2:59 PM csk

91 Financial Statement Presentation These financial statements are prepared on the cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States. Accordingly, revenue is recognized when cash is received and expenses are recognized when cash is disbursed. Cash Receipts All cash receipts are deposited with the University. The Student Activities and Facilities Fees shares in the earnings of the University's pooled investments, which amounted to a rate of return of 2% during each of the years ended. At, the University's pooled investments were allocated as follows: U.S. Treasury and other agencies' debt 40% 36% Collateralized mortgage obligations 18% 32% Consolidated endowment fund (a mutual fund sponsored by the University) 29% 23% Asset-backed securities 6% 6% Cash and certificates of deposit (partially unsecured) 7% 3% 100% 100% Program Lost Revenue In July 2009, the Board of Regents approved the renovation of the Husky Union Building, the Hall Health Center, and the Ethnic Cultural Center (see Note 4). As part of this approval, $3.6 million of the Student Activities and Facilities Fees was committed to reimburse these entities for lost operational revenue. The actual reimbursements will be based on amounts requested by the various departments. During the year ended June 30, 2013, $128,044 was disbursed to Housing and Food Services for program lost revenue. No disbursements were made during the year ended June 30, 2014, as the renovations are complete, and no further program lost revenue has occurred. Other Transfers During the year ended June 30, 2013, the University determined it was required to return excess fees charged to students (amounting to $692,176). The refunding process was administered through Student Activities and Facilities Fees. Accordingly, the University transferred $692,196 to Student Activities and Facilities Fees. During the year ended June 30, 2014, these fees were paid out to the students by Student Activities and Facilities Fees. Note 2. Uncollected Fees As these financial statements are presented on the cash basis of accounting, receivables and payables are not recognized. Student Life had Student Activities and Facilities Fees that were uncollected (and are, therefore, receivable) of approximately $986,358 and $1,003,154 at, respectively fs Revised: 10/21/2014 2:59 PM csk

92 Note 3. Bonds Student Activities and Facilities Fees are used to make semi-annual debt service payments on the Series 2005 Revenue Bonds issued by the University. The Series 2005 Bonds require varying annual principal and interest payments, with the final payment due in June The principal amount of the bonds outstanding was $37,075,000 and $38,570,000 at, respectively, with interest rates ranging from 2.75% to 5.00%. These bonds were issued for the purpose of redeeming certain other outstanding bonds. The following is a summary of future payments (principal and interest) to be paid to cover the debt service payments for the years ending June 30: Principal Interest Total 2015 $ 1,565,000 $ 1,853,750 $ 3,418, ,645,000 1,775,500 3,420, ,725,000 1,693,250 3,418, ,815,000 1,607,000 3,422, ,905,000 1,516,250 3,421, ,050,000 6,053,750 17,103, ,110,000 3,000,250 17,110, ,260, ,000 3,423,000 $ 37,075,000 $ 17,662,750 $ 54,737,750 As of the date of these financial statements, discussions were in progress to refinance the bonds with the University's Internal Lending Program. Note 4. Internal Lending Program As discussed in Note 1 Program Lost Revenue, in July 2009, the Board of Regents approved the renovation of the Husky Union Building, the Hall Health Center, and the Ethnic Cultural Center. A majority of the money to fund the renovation was borrowed from the University's Internal Lending Program (a program sponsored by the University to consolidate borrowing activities by University departments). On behalf of the SAF Committee, Student Life has borrowings available from the University Internal Lending Program of $126,000,000, $8,000,000, and $16,000,000 for the Husky Union Building, the Hall Health Center, and the Ethnic Cultural Center, respectively. At June 30, 2014, the outstanding balances on these borrowings were $93,577,045, $6,840,875, and $13,919,445 for the Husky Union Building, the Hall Health Center, and the Ethnic Cultural Center, respectively, all bearing interest at 5.5%. The interest rate is reviewed each year and is subject to adjustment by the Board of Regents. Loan payments began in October 2011 for the Hall Health Center with a 30-year amortization and term. Loan payments began in October 2012 for the Husky Union Building and the Ethnic Cultural Center, also with 30-year amortizations and terms. The renovation activity is not included in these financial statements. Borrowings are being repaid by the Student Facilities Renovation Fees, which are included in the student activities and facilities fees cash receipts at both fs Revised: 10/21/2014 2:59 PM csk

93 The following is a summary of future payments (principal and interest) to be paid to the University to cover the debt service payments for the years ending June 30: Principal Interest Total 2015 $ 1,744,844 $ 6,245,006 $ 7,989, ,843,267 6,146,583 7,989, ,947,242 6,042,609 7,989, ,057,081 5,932,769 7,989, ,173,117 5,816,733 7,989, ,848,573 27,100,680 39,949, ,904,916 23,044,336 39,949, ,241,861 17,707,390 39,949, ,263,700 10,685,551 39,949, ,312,764 2,169,281 25,482,045 $ 114,337,365 $ 110,890,938 $ 225,228,303 The ratio of cash receipts to all debt service payments (bonds and Internal Lending Program debt) for the years ended June 30 were as follows: to to 1 Note 5. Subsequent Events Student Activities and Facilities Fees has evaluated subsequent events through the date these financial statements were available to be issued, which is the same date as the independent auditors' report. During June 2014, the Student and Activities Fee Committee signed a memorandum of understanding with Student Publications to pay $615,000 to assume certain debts owed by Student Publications to the University of Washington. The amount is to be repaid over a period of time to be determined by Student Publications' ability to repay the debt (not to exceed thirty years) fs Revised: 10/21/2014 2:59 PM csk

94 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Financial Statements (With Independent Auditors Report Thereon)

95 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Table of Contents Page Independent Auditors Report 1 Management s Discussion and Analysis 3 Statements of Net Position 10 Statements of Revenues, Expenses, and Changes in Net Position 11 Statements of Cash Flows 12 Notes to Financial Statements 13

96 KPMG LLP Suite Eighth Avenue Seattle, WA Independent Auditors Report The Board of Regents University of Washington: We have audited the accompanying financial statements of the University of Washington Commuter Services (Unit or CS), which comprise the statements of net position as of, and the related statements of revenues, expenses, and changes in net position, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. As discussed in note 1 to the financial statements, the financial statements of the Unit, an auxiliary enterprise within the University of Washington (the University), are intended to present the financial position, the changes in financial position and cash flows of only the respective portion of the business-type activities of the University that is attributable to the transactions of the Unit. They do not purport to, and do not, present fairly the financial position of the University as of, the changes in its financial position or its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

97 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Washington Commuter Services as of, and the changes in its net position and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. Other Matter U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 3 through 9 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Seattle, Washington November 4,

98 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Management s Discussion and Analysis (Unaudited see accompanying independent auditors report) Discussion and Analysis Prepared by Management The following discussion and analysis provides an overview of the financial position and activities of the University of Washington Commuter Services (CS) for the years ended June 30, 2014, 2013, and This discussion has been prepared by management and should be read in conjunction with the financial statements and accompanying notes, which follow this section. Using the Financial Statements CS s financial statements include the statements of net position, statements of revenues, expenses, and changes in net position, statements of cash flows, and notes to financial statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) principles, which establish standards for external financial reporting for public colleges and universities. The financial health of CS can be measured by reviewing the summaries and explanations that follow. Statements of Net Position Summary The statements of net position in the financial statements reflect the financial condition of CS at the end of the year and report the various categories of all assets and liabilities. The following statements of net position summary show CS s total assets, total liabilities, and net position as of June 30, 2014, 2013, and 2012: Statements of Net Position Summary Current assets $ 4,194,862 9,832,832 8,891,615 Noncurrent assets: Capital assets, net 48,989,956 46,738,698 39,413,815 Other noncurrent assets 11,839,214 7,801,657 9,263,102 Total assets $ 65,024,032 64,373,187 57,568,532 Current liabilities $ 1,814,978 1,719,055 2,567,092 Noncurrent liabilities 13,205,602 13,782,853 14,335,105 Total liabilities 15,020,580 15,501,908 16,902,197 Net position 50,003,452 48,871,279 40,666,335 Total liabilities and net position $ 65,024,032 64,373,187 57,568,532 Following are comments about the changes highlighted by the statements of net position summary: Current assets consist of cash, accounts receivable, and prepaid expenses. Current assets were $2.4 million, $8.1 million, and $6.3 million greater than current liabilities at the end of fiscal years 2014, 2013, and 2012, respectively. The 2014 decrease of $5.6 million or 57% was caused by a decrease in cash resulting from a slight decrease in parking volume and an increase in expenses from operations. The 2013 increase 3 (Continued)

99 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Management s Discussion and Analysis (Unaudited see accompanying independent auditors report) of $941,000 or 11% was caused by an increase in cash generated from a slight increase in parking volume and a decrease in expenses from operations. Noncurrent assets consist of capital assets and advances to University of Washington (the University) for capital projects. Noncurrent assets increased by $6.3 million or 12% in 2014 and increased by $5.9 million or 12% in The 2014 increase was primarily because of a $4 million increase in advances to the University for capital projects including the Burke Gilman Trail and the E-12 parking lot and $4.3 million of capital asset additions offset by $2 million of depreciation due to the timing of projects compared to The 2013 increase was primarily because of a $1.5 million decrease in advances to the University for capital projects including the Burke Gilman Trail and $9.2 million of capital asset additions offset by $1.8 million of depreciation due to the timing of projects compared to Current liabilities increased by $96,000 or 6% during fiscal year 2014 and decreased by $848,000 or 33% during fiscal year The 2014 increase is primarily caused by a $52,000 increase in accrued salaries and vacation payable and 2013 decrease is caused by a $1.0 million decrease in due to the University as CS paid off this obligation in full offset by an increase in accounts payable. Changes in accrued salaries and vacation payable are due to changes in employee headcount. Noncurrent liabilities decreased by $577,000 or 4% and $552,000 or 4% in fiscal years 2014 and 2013, respectively. The 2014 decrease was due to $577,000 moving into the current portion of Internal Lending Program payable due to a 2015 principal payment. The 2013 decrease was due to $552,000 moving into the current portion of Internal Lending Program payable due to a 2014 principal payment. The change in net position measures whether the overall financial condition has improved or deteriorated during the year. Total net position increased by $ 1.1 million or 2% and $8.2 million or 20% during fiscal years 2014 and 2013, respectively. The 2014 and 2013 increases are mostly due to the acquisitions of parking garages in 2014 and Net Position The following table is a summary of the net position for CS at June 30, 2014, 2013, and 2012: Net Position Summary Net investment in capital assets $ 35,207,103 32,403,594 24,551,459 Unrestricted 14,796,349 16,467,685 16,114,876 Total net position $ 50,003,452 48,871,279 40,666,335 The categories of net position listed in the table above are defined as follows: Net investment in capital assets is CS s total investment in property, plant, equipment and infrastructure and unspent debt proceeds, net of accumulated depreciation, and any outstanding debt obligations related to those capital assets. 4 (Continued)

100 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Management s Discussion and Analysis (Unaudited see accompanying independent auditors report) Unrestricted net position is all other funds available to CS for any purpose. Unrestricted net position is often internally designated for specific purposes. Following are comments about the changes in CS s net position summary: Net investment in capital assets increased by $2.8 million or 9% and increased by $7.9 million or 32% in fiscal years 2014 and 2013 to a total of $35.2 million and $32.4 million, respectively. The balance increases as CS s payable to the University s Internal Lending Program (ILP) are paid down or when CS funds fixed asset purchases without financing. The increase reflects CS s continuing investment in facilities. Unrestricted net position decreased by $1.7 million or 10%, and increased by $353,000 or 2% in fiscal years 2014 and 2013, respectively. The decrease in 2014 was caused by the decrease of operating revenue due to a slight decrease in parking volume and an increase in operating expenses. The 2013 increase was due to the increase of operating revenue due to a slight increase in parking volume. Capital Improvements and Related Debt In fiscal year 2014, capital additions were $4.3 million, which included $2.6 million for Mercer parking garage, $1.3 million for Burke Gilman Trail Design, $254,000 E 12 Parking Study, and $127,000 for equipment. In fiscal year 2013, capital additions were $9.2 million, which included $5.1 million for Cedar parking garage, $3.5 million for Mercer garage, $163,000 E 12 Parking Study, and $461,000 for Burke Gilman Trail Design. Total debt decreased from $14.3 million of outstanding principal due at the end of fiscal year 2013 to $13.8 million at the end of fiscal year 2014 as a result of scheduled principal payments. 5 (Continued)

101 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Management s Discussion and Analysis (Unaudited see accompanying independent auditors report) Statements of Revenues, Expenses, and Changes in Net Position The statements of revenues, expenses, and changes in net position present how CS s operations and nonoperating items resulted in changes in net position. In accordance with GASB reporting principles, revenues and expenses are classified as either operating or nonoperating. The following summary shows the revenues, expenses, and changes in net position for the years ended June 30, 2014, 2013, and Revenues, Expenses, and Changes in Net Position Summary Operating revenues $ 12,338,660 13,322,100 13,336,085 Operating expenses (12,613,132) (9,293,205) (10,317,761) Operating income (loss) (274,472) 4,028,895 3,018,324 Nonoperating expenses (363,130) (334,393) (450,119) Other revenues and transfers 1,769,775 4,510,442 (1,060,593) Increase in net position 1,132,173 8,204,944 1,507,612 Net position, beginning of year 48,871,279 40,666,335 39,158,723 Net position, end of year $ 50,003,452 48,871,279 40,666,335 Revenues from All Sources The following table summarizes revenues from all sources for the years ended June 30, 2014, 2013, and 2012: Revenues from All Sources Summary Parking revenue $ 10,406,575 11,139,627 11,087,208 Fine revenue 814,225 1,235,304 1,060,593 Reimbursement for football related expenses 166,464 27, ,556 Revenue from Triangle Garage 951, ,939 1,009,728 Interest income 289, , ,920 Capital contribution 2,584,000 5,056,024 Due from University 331,406 Transfer from University 358,316 Total revenue all sources $ 15,212,194 19,409,273 13,683,005 6 (Continued)

102 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Management s Discussion and Analysis (Unaudited see accompanying independent auditors report) Following are comments about the changes highlighted by the revenues from all sources summary: Parking revenue continues to be the largest source of revenue for CS. Parking revenue decreased by $733,000 or 7% in 2014 primarily due to reimbursement to Intercollegiate Athletics (ICA) and a decrease in volume. Fine revenue in 2014 decreased $421,000 or 34% from 2013 as a result of decreased collection on outstanding citation balances, particularly balances from one to six years old. Fine revenue in 2013 increased $175,000 or 16% from 2012 as a result of increased collection on outstanding citation balances. Interest income represents interest earned from cash and cash equivalents in the University s Invested Funds Pool and advances to the University for capital projects. Interest income in 2014 decreased $52,000 or 15% due to a decrease in the average cash balance. Interest income was materially unchanged in 2013 from 2012 as the average cash balance was consistent year over year. The 2014 capital contribution resulted from the transfer of the Mercer garage from Housing and Food Services to Commuter Services. The 2013 capital contribution resulted from the transfer of the Cedar garage from Housing and Food Services to Commuter Services. Transfer from University in 2013 includes adjustments to revenue for refunds returned on expensed capital projects. Expenses and Expense Transfers The following table summarizes expenses and expense transfers for the years ended June 30, 2014, 2013, and 2012: Expenses and Expense Transfers Summary Salaries and wages $ 2,606,907 2,265,294 2,291,067 Employee benefits 807, , ,600 Temporary services 61,386 53, ,875 Maintenance 3,150, , ,445 Printing 63,613 58,051 58,873 Outside services 243, ,933 1,213,773 Utilities 267, , ,484 Data processing 224, , ,505 Motorpool 129, , ,711 Garage rental 35,248 34,642 27,177 Insurance 23,401 27,582 31,496 Supplies and materials 416, , ,859 Telephone 56,687 50,607 52,134 7 (Continued)

103 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Management s Discussion and Analysis (Unaudited see accompanying independent auditors report) Expenses and Expense Transfers Summary Campus services $ 1,443,423 1,107,289 1,089,428 Miscellaneous 95, , ,818 University overhead 991,250 1,086, ,807 Depreciation 1,997,030 1,826,462 1,791,709 Interest 652, , ,039 Total expenses 13,265,796 9,969,025 11,114,800 Transfer to the University for UPASS 814,225 1,235, ,199 Transfer to the University for Shuttles 607,394 Total expense transfers 814,225 1,235,304 1,060,593 Total expenses and expense transfers $ 14,080,021 11,204,329 12,175,393 Following are comments about the changes in expenses and expense transfers highlighted by the expenses and transfers summary: CS s expenses increased by $3.3 million or 33% in fiscal year 2014 and decreased by $1.1 million or 10% in fiscal year The increase in 2014 is primarily due to a $2.5 million increase in maintenance expense discussed below. The decrease in 2013 is primarily due to the fluctuation in CS s outside services expense discussed below. Additionally, the combination of salaries and wages and employee benefits increased by $384,000 or 13% in fiscal year 2014 due to increases in headcount, and increased by $50,000 or 2% in fiscal year 2013 due to increases in benefits rates. CS s outside services expense decreased by $57,000 or 19% in fiscal year 2014 and decreased by $913,000 or 75% in fiscal year The decrease in 2014 and 2013 is the result of a decrease in the use of outside contractors for repairs and maintenance on facilities. CS s maintenance expense increased by $2.5 million and decreased by $270,000, or 394% and 30% in fiscal years 2014 and 2013, respectively. The primary increase in 2014 was the result of work performed on painting and paving garages and parking lots. The decrease in 2013 was the result of work performed on a new escalator maintenance contract in 2012, and no similar project in CS s campus services expense increased by $336,000 or 30% in fiscal year 2014 and increased by $18,000 or 2% in fiscal year The increase in 2014 and 2013 is due to an increase in the percentage use of shared services charged to CS and general increases in shared services expenses. CS s depreciation expense increased by $171,000 or 9% and $35,000 or 2% in fiscal years 2014 and 2013, respectively, because of the capital asset additions in both fiscal years. 8 (Continued)

104 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Management s Discussion and Analysis (Unaudited see accompanying independent auditors report) CS s transfer to the University for UPASS decreased by $421,000, or 34% in fiscal 2014, and increased by $782,000, or 173% in fiscal year The fine revenue in 2014 and 2013 was used to support the UPASS program. CS changed the method of transfer to the University for UPASS as this is now collected by the University of Washington on a transaction basis through the collection of the Transportation Demand Management (TDM) fee on most parking permits sold. This was partially offset by the fine revenue used to support this program. CS is now responsible for this revenue source. The UPASS program is operated by the University s Commute Options Group and provides a package of flexible, low cost transportation choices for faculty, staff, and students. It includes unlimited access to public transit, and a parking management component that subsidizes carpool and vanpool parking rather than single occupant vehicles. CS recorded a transfer to the University for the Shuttles program used to transport student, faculty, and staff between different University locations of $607,000 in 2012 as the fine revenue was used to support the Shuttles program. There was no transfer to the University for the Shuttles program in 2014 and 2013 as the fine revenue was used to support the UPASS program as discussed above. 9

105 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Statements of Net Position Assets Current assets: Cash and cash equivalents in the University of Washington Invested Funds Pool (note 2) $ 3,680,841 9,402,148 Accounts receivable 475, ,882 Prepaid expenses 38,709 9,802 Total current assets 4,194,862 9,832,832 Noncurrent assets: Advances to University for capital projects 11,839,214 7,801,657 Capital assets (less accumulated depreciation of $39,746,103 and $37,749,073, respectively) (note 3) 48,989,956 46,738,698 Total noncurrent assets 60,829,170 54,540,355 Total assets $ 65,024,032 64,373,187 Liabilities and Net Position Current liabilities: Accounts payable $ 639, ,696 Accrued salaries and vacation payable 404, ,326 Unearned revenue 193, ,782 Internal lending program payable, current portion (note 5) 577, ,251 Total current liabilities 1,814,978 1,719,055 Noncurrent liabilities: Internal lending program payable, net of current portion (note 5) 13,205,602 13,782,853 Total noncurrent liabilities 13,205,602 13,782,853 Total liabilities 15,020,580 15,501,908 Net position: Net investment in capital assets 35,207,103 32,403,594 Unrestricted 14,796,349 16,467,685 Total net position 50,003,452 48,871,279 Total liabilities and net position $ 65,024,032 64,373,187 See accompanying notes to financial statements. 10

106 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Statements of Revenues, Expenses, and Changes in Net Position Years ended Operating revenues: Parking revenue $ 10,406,575 11,139,627 Fine revenue 814,225 1,235,304 Reimbursement for football related expenses 166,464 27,230 Revenue from Triangle Garage 951, ,939 Total operating revenues 12,338,660 13,322,100 Operating expenses: Salaries and wages 2,606,907 2,265,294 Employee benefits 807, ,288 Temporary services 61,386 53,183 Maintenance 3,150, ,455 Printing 63,613 58,051 Outside services 243, ,933 Utilities 267, ,577 Data processing 224, ,397 Motorpool 129, ,029 Garage rental 35,248 34,642 Insurance 23,401 27,582 Supplies and materials 416, ,017 Telephone 56,687 50,607 Campus services 1,443,423 1,107,289 Miscellaneous 95, ,471 University overhead 991,250 1,086,928 Depreciation 1,997,030 1,826,462 Total operating expenses 12,613,132 9,293,205 Operating (loss) income (274,472) 4,028,895 Nonoperating revenues (expenses): Interest income 289, ,427 Interest expense (652,664) (675,820) Total net nonoperating expenses (363,130) (334,393) (Loss) income before other revenues and transfers (637,602) 3,694,502 Other revenues and transfers: Transfer to the University for UPASS (814,225) (1,235,304) Due from University 331,406 Transfer from the University 358,316 Capital contribution 2,584,000 5,056,024 Total other revenues and transfers 1,769,775 4,510,442 Increase in net position 1,132,173 8,204,944 Net position: Net position at beginning of year 48,871,279 40,666,335 Net position at end of year $ 50,003,452 48,871,279 See accompanying notes to financial statements. 11

107 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Statements of Cash Flows Years ended Cash flows from operating activities: Receipts from parking fees and fines $ 11,187,644 12,478,405 Receipts from reimbursement for football related expenses 166,464 27,230 Receipts from Triangle Garage 951,396 1,001,515 Payments to suppliers (6,242,596) (3,204,172) Payments to employees (2,554,360) (2,257,551) Payments for benefits (807,154) (764,288) Payments to the University for overhead (991,250) (1,086,928) Net cash provided by operating activities 1,710,144 6,194,211 Cash flows from noncapital financing activities: Transfer to the University for UPASS (814,225) (1,235,304) Other Transfers to the University (352,249) Net cash used in noncapital financing activities (814,225) (1,587,553) Cash flows from capital and related financing activities: Payments to University for capital assets (5,701,845) (2,633,876) Principal paid on bonds payable (552,251) (527,252) Interest paid (652,664) (675,820) Net cash used in capital and related financing activities (6,906,760) (3,836,948) Cash flows from investing activity: Interest income 289, ,427 Net cash provided by investing activity 289, ,427 Net increase (decrease) in cash and cash equivalents (5,721,307) 1,111,137 Cash and cash equivalents at beginning of year 9,402,148 8,291,011 Cash and cash equivalents at end of year $ 3,680,841 9,402,148 Reconciliation of operating income to net cash provided by operating activities: Operating income (loss) $ (274,472) 4,028,895 Adjustments to reconcile operating (loss) income to net cash provided by operating activities: Depreciation expense 1,997,030 1,826,462 Changes in assets and liabilities: (Increase) decrease in accounts receivable (54,430) 174,809 (Increase) in prepaid expenses (28,907) (4,889) Increase (decrease) in accounts payable (2,898) 150,950 Increase in accrued salaries and vacation payables 52,547 7,743 Increase in unearned revenue 21,274 10,241 Net cash provided by operating activities $ 1,710,144 6,194,211 Noncash capital and related financing activities: Capital assets paid for by University advances $ 1,664,288 4,095,321 Capital contribution from Housing and Food Services 2,584,000 5,056,024 See accompanying notes to financial statements. 12

108 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements (1) Organization and Summary of Significant Accounting Policies (a) Organization The University of Washington Commuter Services (Unit or CS), a unit of Facilities Services, is responsible for the operation of the parking facilities of the University of Washington (the University). (b) Basis of Presentation The financial statements of the Unit have been prepared in accordance with the Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The Unit is reporting as a special purpose government engaged in business type activities (BTA). In accordance with BTA reporting, the Unit presents a management s discussion and analysis, statements of net position, statements of revenues, expenses, and changes in net position, statements of cash flows, and notes to the financial statements. The financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. The Unit reports capital assets net of accumulated depreciation (as applicable), and reports depreciation expense in the statement of revenues, expenses, and changes in net position. In June 2012, the GASB approved Statement No. 68, Accounting and Financial Reporting for Pensions, which will take effect in the fiscal year ending June 30, This Statement requires governments providing defined benefit pensions to their employees to recognize their long-term obligation for pension benefits as a liability for the first time, along with the associated assets which have been set aside to fund the plan. Since the University participates in several cost sharing pension plans which are administered by the state of Washington Department of Retirement Systems (DRS), this statement will require the University to recognize its proportionate share of the state-wide net pension liability for each of the plans in which it participates. The Statement also eliminates the method of amortizing the liability balances over several years, and instead requires full recognition of the net liability upon implementation. The requirement of GASB Statement No. 68 to record a proportionate share of retirement plan unfunded pension liabilities may negatively impact the University s future unrestricted net position. The University is currently analyzing the impact of this Statement. (c) Capital Assets Capital expenditures for facilities and equipment funded by the Unit are reflected as capital assets on the Unit s statements of net position. Buildings and equipment are stated at cost. Additions, replacements, major repairs, and renovations are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally years for building 13 (Continued)

109 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements components, years for infrastructure and land improvements, and 5 7 years for equipment. Expenditures for equipment and repairs that represent normal replacement of such equipment and routine maintenance of the buildings are expensed as incurred. (d) (e) Advances to University for Capital Projects Advances to the University for capital projects represent the difference between the cash paid and the capital expenditures incurred by the University for various capital projects at year-end, which CS expects to use in capital expenditures or be refunded if not used in the future. Revenue Recognition Parking sales are recognized as revenue in the period when the parking is utilized. The University Department of Intercollegiate Athletics (ICA) and CS entered into a formal written agreement whereby CS operates the parking for Husky football home games for ICA. ICA is entitled to all parking revenues from Husky football games and reimburses CS for all expenses incurred by CS. The reimbursement for football related expenses is reported as CS s operating revenue. The University of Washington Medical Center (UWMC) and CS entered into a formal written agreement whereby UWMC operates the Triangle Garage for CS and pays the Net Operating Revenue from the Triangle Garage to CS. The Net Operating Revenue accrued per the Triangle Garage operating results is reported as CS s operating revenue. (f) (g) Unearned Revenues Funds received from the sale of permits to be utilized for periods subsequent to June 30 are reported as unearned. Permit sales are recognized as revenue in the period when the parking is utilized. At, unearned revenues were $193,056 and $171,782, respectively. Federal Income Taxes As a part of the University, the Commuter Services is exempt from federal income taxes, except to the extent of unrelated business taxable income. Commuter Services did not incur unrelated business income tax during fiscal years 2014 and 2013, and accordingly, the financial statements do not include a provision for federal income taxes. (2) Cash and Cash Equivalents in the University of Washington Invested Funds Pool All of the Unit s cash and cash equivalents are invested in the University of Washington s Invested Funds Pool. The following information is for the entire pool and are audited disclosures as a part of the University of Washington audit. The Board of Regents of the University of Washington is responsible for the management of the University s investments. The Board establishes investment policy, which is carried out by the Chief Investment Officer. The University of Washington Investment Committee, comprising Board members and investment professionals, advises on matters relating to the management of the University s investment 14 (Continued)

110 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements portfolios. The composition of the carrying amounts of investments by type at are listed below. University Investments Carrying value Investment type (Dollars in thousands) Cash equivalents $ 16, ,781 Fixed income 1,972,553 1,655,711 Equity 1,672,262 1,287,084 Nonmarketable alternatives 349, ,632 Absolute return 509, ,416 Real assets 219, ,792 Miscellaneous 4,724 5,917 Total investments $ 4,744,819 4,138,333 Investment Pools The University combines most short-term cash balances into the Invested Funds Pool. At June 30, 2014, the Invested Funds Pool totaled $1,606,152,000 compared to $1,564,368,000 at June 30, The Invested Funds Pool also owns units in the Consolidated Endowment Fund valued at $668,863,000 on June 30, 2014 and $468,187,000 on June 30, By University policy, departments with qualifying funds in the Invested Funds Pool receive distributions based on their average balances and on the type of balance. Campus depositors received 2% in fiscal years 2014 and Endowment operating and gift accounts received 3% in both fiscal years 2014 and The difference between the actual earnings of the Invested Funds Pool and the calculated distributions is used to support activities benefiting all University departments. The majority of the endowed funds are invested in a pooled fund called the Consolidated Endowment Fund (CEF). Individual endowments purchase units in the pool on the basis of a per unit valuation of the CEF at fair value on the last business day of the calendar quarter. Income is distributed based on the number of units held. RCW of the Washington State Code and the Uniform Prudent Management of Institutional Funds Act allow for total return expenditure under comprehensive prudent standards. Interest Rate Risk The University manages interest rate risk through its investment policies and the investment guidelines established with each manager. Each fixed income manager is assigned a maximum boundary for duration as compared to the manager s relevant benchmark index. The goal is to allow ample freedom for the manager to perform, while controlling the interest rate risk in the portfolio. The weighted average effective duration of the University s fixed income portfolio was 1.91 years at June 30, 2014 and 2.95 years, as of June 30, Credit Risk Fixed income securities are subject to credit risk, which is the risk that the issuer or other counterparty to a financial instrument will not fulfill its obligations, or that negative perceptions of the issuer s ability to make these payments will cause prices to decline. Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The University 15 (Continued)

111 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements Investment Policies limit fixed income exposure to investment grade assets. The Investment Policy for the Invested Funds cash pool requires each manager to maintain an average quality rating of AA as issued by a nationally recognized rating organization. The Invested Funds liquidity pool requires each manager to maintain an average quality rating of A and to hold 25% of their portfolios in government and government agency issues. The Investment Policy for the CEF reflects its long-term nature by specifying average quality rating levels by individual manager, but still restricting investment to investment grade credits. Duration and credit risk figures at exclude $49,348,000 and $53,541,000, respectively, of fixed income securities held outside the CEF and the Invested Funds Pool. These amounts make up 2.48% and 2.80%, respectively, of the University s fixed income investments (including cash equivalents), and are not included in the duration figures detailed in the following table. The composition of the fixed income securities at, along with credit quality and effective duration measures is summarized below: Fixed Income: Credit Quality and Effective Duration Investment Noninvestment Not Duration Investments U.S. government grade* grade rated Total (in years) (Dollars in thousands) 2014: U.S. Treasuries $ 877, , U.S. government agency 597, , Mortgage-backed 103,105 93, , Asset-backed 178,075 8,495 1, , Corporate and other 79, , Total $ 1,475, , ,933 1,281 1,940, Fixed Income: Credit Quality and Effective Duration Investment Noninvestment Not Duration Investments U.S. government grade* grade rated Total (in years) (Dollars in thousands) 2013: U.S. Treasuries $ 730, , U.S. government agency 661, , Mortgage-backed 98,779 94,196 9, , Asset-backed 164,394 9,743 3, , Corporate and other 86, , Total $ 1,391, , ,939 13,603 1,858, * Investment grade securities are those that are rated BBB and higher by Standard and Poor s or Baa and higher by Moody s. 16 (Continued)

112 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements Foreign Currency Risk The University s Investment Policies permit investments in international equity and other asset classes, which can include foreign currency exposure. The University held non-u.s. denominated securities at of $1,029,318,000 and $771,070,000, respectively. Investments Denominated in Foreign Currency June (Dollars in thousands) Euro (EUR) $ 156, ,213 Chinese Renminbi (RMB) 126,848 73,109 Indian Rupee (INR) 100,451 65,686 Japanese Yen (JPY) 65,017 45,735 Brazilian Real (BRL) 56,611 47,956 Russian Ruble (RUB) 56,517 47,302 British Pound (GBP) 54,281 51,193 Hong Kong Dollar (HKD) 50,663 24,285 South Korean Won (KRW) 49,150 29,477 Canadian Dollar (CAD) 41,888 27,109 Swiss Franc (CHF) 39,900 36,888 Taiwanese Dollar (TWD) 30,894 23,796 Philippine Peso (PHP) 18,974 22,737 Indonesian Rupiah (IDR) 14,732 19,301 Remaining currencies 166, ,283 Total $ 1,029, , (Continued)

113 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements (3) Capital Assets Capitalized asset activity for the years ended is summarized as follows: Balance at Balance at June 30, Additions/ June 30, 2013 Transfers Retirements 2014 Buildings $ 79,118,611 6,080,000 85,198,611 Furniture, fixtures, and equipment 1,159, ,345 1,286,667 Construction in progress* 4,209,838 (1,959,057) 2,250,781 Total 84,487,771 4,248,288 88,736,059 Less accumulated depreciation: Buildings 36,675,993 1,921,502 38,597,495 Furniture, fixtures, and equipment 1,073,080 75,528 1,148,608 * Nondepreciable Total accumulated depreciation 37,749,073 1,997,030 39,746,103 Capital assets, net $ 46,738,698 2,251,258 48,989, (Continued)

114 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements Balance at Balance at June 30, Additions/ June 30, 2012 Transfers Retirements 2013 Buildings $ 74,062,587 5,056,024 79,118,611 Furniture, fixtures, and equipment 1,182,631 19,390 (42,699) 1,159,322 Construction in progress* 133,907 4,075,931 4,209,838 Total 75,379,125 9,151,345 (42,699) 84,487,771 Less accumulated depreciation: Buildings 34,889,455 1,786,538 36,675,993 Furniture, fixtures, and equipment 1,075,855 39,924 (42,699) 1,073,080 * Nondepreciable Total accumulated depreciation 35,965,310 1,826,462 (42,699) 37,749,073 Capital assets, net $ 39,413,815 7,324,883 46,738,698 (4) Operating Leases CS has lease agreements with the University s Real Estate Office in effect that are considered operating leases for leased parking spaces from May 1, 2010 through June 30, During the year ended June 30, 2014, CS recorded rent expense of $35,248. Future lease payments under these leases as of June 30, 2014 are as follows: Dollars Years ending June 30: 2015 $ 32, , , , , ,981 Total minimum lease payment $ 167, (Continued)

115 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements (5) Revenue Bond Refinancing and Internal Lending Program During 2004, Commuter Services issued $20,410,000 of Revenue Bonds to refund the outstanding Series 1995 Revenue Bonds and to finance various parking projects. The Revenue Bonds are held by the University and bear interest at rates from 3.00% to 5.00% depending on the fiscal year, with interest and principal payments due on May 1 and November 1 of each year. The Bonds are secured by the pledge of the Parking System revenues over operating expenses. On March 7, 2012, these 2004 Revenue Bonds were refunded and replaced by General Revenue and Refunding Bonds by the University. The amount refunded was $16,405,000, which resulted in no change in the total debt service payments and resulted in an economic gain of $210,023 to the University. The new bonds are administered under the Internal Lending Program (ILP). Total amount of defeased bonds as of was $16,210,000. The outstanding principle on those defeased bonds was $14,975,000 as of June 30, 2014 and $15,605,000 as of June 30, The purpose of the ILP is to lower the University s overall cost of capital and provide internal borrowing units with a stable and predictable borrowing rate. The ILP makes loans to internal borrowers at a uniform internal lending rate. These loans are funded through the issuance of University General Revenue bonds and notes. ILP program policies include a provision for a rate stabilization reserve and a provision for rate adjustments if necessary. Under the terms of the ILP, rate adjustments will apply to all outstanding debt obligations, including debt issued prior to the ILP implementation. The ILP lending rate will be reviewed annually and a preliminary indication of a rate adjustment will be announced to ILP participants 12 months in advance of the effective date. Final rate adjustments require approval by the Board of Regents. Future principal and interest payments due through maturity dates are as follows: Principal Interest Years ending June 30: 2015 $ 577, , , , , , , , , ,073 Thereafter 10,631,598 2,695,556 $ 13,782,853 5,556, (Continued)

116 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements ILP activity for the years ended is summarized as follows: Balance as of Balance as of June 30, 2013 Additions Reductions June 30, 2014 Internal lending program payable $ 14,335, ,251 13,782,853 Balance as of Balance as of June 30, 2012 Additions Reductions June 30, 2013 Internal lending program payable $ 14,862, ,252 14,335,104 (6) Related-Party Transactions The University provides support to Commuter Services by performing the following services: The University requires a discretionary transfer for overhead equal to 8.88% of certain Commuter Services revenues in exchange for providing the following: Use of the University s buildings and equipment Administrative and accounting support Serving as the purchasing and disbursing agent Various other operational and support services The University has included Commuter Services in its liability self-insurance program and allocates a portion of the program s cost to Commuter Services in an amount established at the University s discretion. Additionally, transfers to and from the University are made at the discretion of the University and Commuter Services. In the year ended June 30, 2012, Commuter Services eliminated the transfer to the University for UPASS as this is now collected by the University of Washington on a transaction basis through the collection of the TDM fee on most parking permits sold. The UPASS program is operated by the University s Transportation Commute Options Department and provides a package of flexible, low cost transportation choices for faculty, staff, and students. It includes unlimited access to public transit, and a parking management component that subsidizes carpool and vanpool parking rather than single occupant vehicles. (7) Pension Plan The University offers two contributory plans: the Washington State Public Employees Retirement System (PERS) plan, a defined-benefit retirement plan; and the University of Washington Retirement Plan (UWRP), a defined-contribution plan with supplemental payment, when required. The Unit s employees participate in the PERS, UWRP and Other Postemployment Benefits (OPEB). The Unit is allocated a cost 21 (Continued)

117 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements for the participation of these plans. The cost is included in the benefits load rate set by the University in calculating its fringe benefit expense and is applied on a per employee basis and is not a significant dollar amount. (a) Public Employees Retirement System Plan Description The University contributes to PERS, a cost sharing multiple employer definedbenefit pension plan administered by the State of Washington Department of Retirement Systems. PERS Plan 1 provides retirement and disability benefits, and minimum benefit increases beginning at age 66 to eligible nonacademic plan members hired prior to October 1, PERS Plans 2 and 3 provide retirement and disability benefits and a cost of living allowance to eligible nonacademic plan members hired on or after October 1, In addition, PERS Plan 3 has a defined contribution component, which is fully funded by employee contributions. The authority to establish and amend benefit provisions resides with the legislature. The PERS issues a publicly available financial report that includes financial statements and required supplementary information for PERS. The report may be obtained by writing to the Department of Retirement Systems, P.O. Box 48380, Olympia, WA , or visiting Funding Policy The Office of the State Actuary, using funding methods prescribed by statute, determines actuarially required contribution rates for PERS. Plan 1 members are required to contribute 6% of their annual covered salary. Contributions for Plan 2 members are determined by the aggregate method, and may vary over time. The contribution rate for Plan 2 employees at was 4.92% and 4.64%, respectively. PERS Plan 3 members can choose contributions ranging from 5.00% to 15.00% of salary, based on the age of the member. The definedcontribution benefit for PERS Plan 3 will depend on the member s contributions, the investment earnings on those contributions, and if an annuity is taken, the age at which the member receives payment. The blended contribution rate for the University at for each of PERS Plans 1, 2, and 3 was 9.21% and 7.21%, respectively. The Commuter Services contributions to PERS for the years ended were $236,069 and $175,172, respectively, which was equal to the annual required contributions for each year. 22 (Continued)

118 UNIVERSITY OF WASHINGTON COMMUTER SERVICES (A Department of University of Washington) Notes to Financial Statements (b) University of Washington Retirement Plan Plan Description Professional staff and certain other salaried employees are eligible to participate in the UWRP, a defined-contribution plan administered by the University. Contributions to the plan are invested in annuity contracts or mutual fund accounts offered by one or more fund sponsors. Employees have at all times a 100% vested interest in their accumulations. Benefits from fund sponsors are available upon separation or retirement at the member s option. RCW 28.B et. seq. assigns the authority to the University of Washington Board of Regents to establish and amend benefit provisions. The Plan has a supplemental payment component that guarantees a minimum retirement benefit based upon a onetime calculation at each employee s retirement date. The University makes direct payments to qualifying retirees when the retirement benefits provided by the fund sponsors do not meet the benefit goals. During the fiscal year ending June 30, 2011, the University amended the supplemental retirement plan, limiting participation to those individuals who were active participants on February 28, Funding Policy Employee contribution rates, based on age, are 5.0%, 7.5%, or 10.0% of salary. The University matches the contributions of employees. Within parameters established by the legislature, contribution requirements may be established or amended by the University of Washington Board of Regents. Employee and employer contributions for the years ended June 30, 2014 and 2013 were $48,622 and $40,740, respectively. The supplemental component of the UWRP is financed on a pay as you go basis. (c) Other Postemployment Benefits (OPEB) The University funds OPEB obligations at a university wide level on a pay as you go basis. Disclosure information, as required under GASB Statement No. 45 (GASB 45), Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions, does not exist at the Unit level, and as a result, the Actuarial Accrued Liability (AAL) is not available for auxiliary entities. The University is ultimately responsible for the obligation; therefore, the annual required contribution (ARC) is not recorded on the Unit s financial statements. (8) Commitments and Contingencies The Unit is subject to various claims and lawsuits that are covered by the University s self-insurance fund in excess of $100,000. (9) Subsequent Events There were no subsequent events through November 4, 2014, which is the date these financial statements were available to be issued. 23

119 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Financial Statements and Schedules (With Independent Auditors Report Thereon)

120 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Table of Contents Page Independent Auditors Report 1 Management s Discussion and Analysis 3 Statements of Net Position 12 Statements of Revenue, Expenses, and Changes in Net Position 13 Statements of Cash Flows 14 Notes to Financial Statements 15 Schedules 1. Operating and Other Revenue by Specific Function Operating Expenses and Other Deductions by Specific Function 29

121 KPMG LLP Suite South West Fifth Avenue Portland, OR Independent Auditors Report The Board of Regents University of Washington: We have audited the accompanying financial statements of the University of Washington Department of Intercollegiate Athletics (the Department), which comprise the statements of net position as of June 30, 2014 and 2013, and the related statements of revenues, expenses, and changes in net position and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. As discussed in note 1 to the financial statements, the financial statements of the Department, an auxiliary enterprise within the University of Washington (the University), are intended to present the financial position, the changes in financial position and cash flows of only the respective portion of the business-type activities of the University that is attributable to the transactions of the Department. They do not purport to, and do not, present fairly the financial position of the University as of, the changes in its financial position or its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

122 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Washington Department of Intercollegiate Athletics as of June 30, 2014 and 2013, and the changes in its net position and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. Other Matters U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 3 through 12 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The supplementary information included in Schedules 1 and 2 is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Seattle, Washington November 12,

123 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Management s Discussion and Analysis Discussion and Analysis Prepared by Management The following discussion and analysis provides an overview of the financial position and activities of the University of Washington Department of Intercollegiate Athletics (ICA) for the years ended June 30, 2014, 2013, and This discussion has been prepared by management and should be read in conjunction with the financial statements and accompanying notes, which follow this section. Using the Financial Statements ICA s financial statements include the statements of net position, statements of revenues, expenses, and changes in net position, statements of cash flow, and notes to financial statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) principles, which establish standards for external financial reporting for public colleges and universities. The financial health of ICA can be measured by reviewing the summaries and explanations that follow. Statements of Net Position Summary The statements of net position in the financial statements reflect the financial conditions of ICA at the end of the last three years and report the various categories of all assets and liabilities. The following statements of net position summary shows ICA s total assets, total liabilities, and net position as of June 30, 2014, 2013, and 2012: Statements of net position summary (In thousands) Current assets $ 19,071 26,031 12,025 Noncurrent assets: Capital assets, net 378, , ,947 Other 82,614 69,464 59,608 Total assets $ 480, , ,580 Current liabilities $ 34,413 33,121 23,173 Noncurrent liabilities 268, ,369 71,611 Total liabilities 303, ,490 94,784 Net position 176, , ,796 Total liabilities and net position $ 480, , ,580 Following are comments about the changes highlighted by the statements of net position summary: Current assets consist primarily of cash and cash equivalents, accounts receivable, and prepaid expenses. Current assets were $15.3 million less than current liabilities at the end of Unearned income is $18.9 million of the current liabilities and will be recorded as revenue in Total current assets were $26.0 million at the end of 2013 and decreased to $19.1 million at the end of 2014 mainly due to a decrease 3 (Continued)

124 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Management s Discussion and Analysis in cash and cash equivalents in the University of Washington Invested Funds Pool and a decrease in the receivable for the capitalized scoreboard lease proceeds of $4.0 million. Current assets increased to $26.0 million at the end of 2013 primarily due to an increase in cash and cash equivalents in the University of Washington Invested Funds Pool. Increases and decreases in the University of Washington Invested Funds occur due to the timing of payments and receipts from operations. Noncurrent assets consist primarily of long-term investments, endowments, and capital assets. Noncurrent assets were $40.5 million more at the end of 2014 and $176.9 million more at the end of 2013 due to the increased value of capital assets from the renovation of Husky Stadium and due to the contributions to permanent endowments in At the end of 2014, there is $25.7 million of noncurrent assets in long-term investment funds. These investments can be used to meet ICA s long-term obligations. Current liabilities increased by $1.3 million during 2014 to a total of $34.4 million. Current liabilities increased by $9.9 million during 2013 to a total of $33.1 million. These changes are comprised primarily of increases in accounts payable due to the timing of payments near year-end and increases in unearned income. Noncurrent liabilities increased by $31.4 million in 2014 and by $165.8 million in 2013 because of changes in principal due to the Internal Lending Program (ILP) of the University of Washington (University). The increases in 2014 and 2013 are primarily related to the debt funding of the renovation of Husky Stadium. The change in net position or equity measures whether the overall financial condition has improved or deteriorated during the year. The total of net position increased by $809 thousand during 2014 and $15.2 million during 2013 due to the combination of a decrease in capital assets (net of related debt) and an increase in related contributions in the current year and an increase in 2014 and in 2013 in market value of long-term investments and endowments. ICA s Net Position or Equity The following table is a summary of the net position or equity for ICA at June 30, 2014, 2013, and 2012: (In thousands) Net investment in capital assets $ 104, , ,283 Restricted: Nonexpendable 43,832 35,817 32,735 Expendable 15,897 12,513 8,974 Unrestricted 12,132 16,039 7,804 Total net position $ 176, , ,796 The categories of net position or equity listed in the table above are defined as follows: Net investment in capital assets is ICA s total investment in property, plant, equipment, and infrastructure, net of accumulated depreciation and any outstanding debt obligations related to those capital assets. 4 (Continued)

125 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Management s Discussion and Analysis Restricted nonexpendable net position consists of funds for which the donor has made the restriction that the principal is not available for expenditures, but investment earnings can be used for specific purposes. Restricted expendable net position are resources that ICA is obligated to spend in accordance with the restrictions placed by donors and/or external parties. Unrestricted net position are all other funds available to ICA for any purpose. Unrestricted assets are often internally designated for specific purposes. Following are comments about the changes highlighted in the net position or equity summary: Net investment in capital assets decreased by $6.7 million in 2014 to a total of $105 million. Net investment in capital assets increased by $376 thousand in 2013 to a total of $111.7 million. This balance increases as debt is paid off or when ICA funds fixed asset purchases without financing. The balance decreases as assets are depreciated. Restricted nonexpendable net position increased by $8.0 million in 2014 and $3.1 million in The increase in 2014 was a combination of an increase in the value of endowments and an increase in additions for new endowments of $5.7 million that were donated to ICA. The increase in 2013 was a combination of an increase in the value of endowments and an increase in additions for new endowments of $1.8 million that were donated to ICA. Restricted expendable net position increased by $3.4 million or in 2014 to a total of $15.9 million due to contributions received offset by expenditures for the Husky Stadium renovation project made in accordance with the donors stipulations. Restricted expendable net position increased by $3.5 million or in 2013 to a total of $12.5 million due to contributions received offset by expenditures for the Husky Stadium renovation project made in accordance with the donors stipulations. Unrestricted net position decreased by $3.9 million in 2014 to $12.1 million due an increase in noncapitalized expenses for opening the new Husky Stadium and new Husky Ballpark. Unrestricted net position increased by $8.2 million in 2013 to $16.0 million due to the increase in the market value of long-term investment funds. Endowments and Other Investments The fair market value of ICA s endowments was $55.3 million at June 30, 2014 compared to $44.5 million at June 30, 2013 and $39.5 million at June 30, The increase in 2014 is due to improvements in the market as well as additional endowment contributions of $5.7 million. The increase in 2013 is due to improvements in the market as well as additional endowment contributions of $1.8 million. ICA had $25.7 million and $22.6 million of long-term investments, not including endowments, in the Consolidated Endowment Fund (CEF) at, respectively. Short-term investments in the Invested Funds Pool used as operating funds for ICA yielded returns of 2.0% in 2014, 2013, and (Continued)

126 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Management s Discussion and Analysis Capital Improvements and Related Debt In 2014, there was a net increase of $27.3 million in capital assets, primarily related to the Husky Stadium renovation project. In 2013, there was a net increase of $167.1 million in capital assets, primarily related to the Husky Stadium renovation project. This project was completed in August Total noncurrent liabilities at the end of 2014 was $268.8 million, which is an increase from the $237.4 million of outstanding principal due at the end of The increase is primarily due to the Husky Stadium renovation project. The portion of ILP long-term debt not related to Husky Stadium renovation, namely the $1.5 million due at the end of 2013, decreased to zero at the end of In 2014, ICA obtained a capitalized field turf lease of $1.7 million from Chase Bank to be paid over three years and a State of Washington Sony HD Camera system equipment lease of $352 thousand to be paid over five years. Statements of Revenues, Expenses, and Changes in Net Position The statements of revenues, expenses, and changes in net position present how ICA s operating and nonoperating items resulted in changes in net position. In accordance with GASB reporting principles, revenues and expenses are classified as either operating or nonoperating. The following summary shows the revenues, expenses, and changes in net position for the years ended June 30, 2014, 2013, and 2012: Revenues, expenses, and changes in net position summary (In thousands) Total operating revenues $ 70,777 53,509 54,949 Operating expenses (112,180) (85,063) (80,553) Operating loss (41,403) (31,554) (25,604) Nonoperating revenues and expenses 25,386 37,211 21,876 Other revenues 16,826 9,575 15,210 Increase in net position ,232 11,482 Net position, beginning of year 176, , ,314 Net position, end of year $ 176, , ,796 6 (Continued)

127 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Management s Discussion and Analysis Revenues from All Sources The following table summarizes revenues from all sources for the years ended June 30, 2014, 2013, and 2012: Revenues from all sources summary (In thousands) Gate ticket sales $ 28,830 20,481 23,789 NCAA/conference distributions 24,935 22,453 16,215 Sponsorships 10,668 7,952 9,577 Other TV, radio, and Internet rights 1,083 Concessions/souvenirs/parking/boat moorage 3, ,674 Other operating revenue 2,935 1,877 2,611 Contributions (noncapital) 24,031 26,599 23,101 Investment income, net 1,918 1,629 1,479 Gain on investments 8,274 5,630 University funded tuition waivers 3,550 3,336 3,066 Capital gifts 11,092 7,759 12,287 Amortization on debt refinance gain Endowment gifts 5,733 1,816 2,924 Total revenue all sources $ 125, ,423 97,950 Following are comments about the changes highlighted by the revenues from all sources summary: Gate ticket sales continue to be a large source of revenue for ICA. Gate ticket sales increased by $8.3 million in 2014 from 2013, due to an increase in season ticket sales in 2014 from 2013 and the first season in the newly renovated Husky Stadium. Gate ticket sales decreased $3.3 million in 2013 from 2012 due to the home games being played at Century Link field and a less desirable schedule than NCAA/Conference distributions increased by $2.5 million in 2014 from The increase in 2014 is due to an additional contractual payout for Pac-12 television broadcast rights, which resulted in $683 thousand more in ICA s share of conference television revenue. Conference postseason/regular season shares increased $443 thousand from In addition, $1.2 million was paid out related to the Pac-12 Network in The main reason for the large increase in 2013 from 2012 is the new Pac-12 television contract that resulted in $8.0 million more in ICA s share of conference television revenue. Decreases in Pac-12 distributions in 2013 include decreases in the bowl reimbursement and Pac-12 championships for ICA. Sponsorship revenue increased by $2.7 million in 2014 from The increase in 2014 is mainly due to a new contract with a higher guarantee payout for multimedia rights with IMG. In 2013, sponsorship revenue decreased by $1.6 million from The decrease was due to a lower guarantee payout from 2013 from IMG and a lower amount for donated advertising. 7 (Continued)

128 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Management s Discussion and Analysis Other TV, radio, and Internet rights revenue was eliminated in 2013 due to the new Pac-12 television agreement. Concessions/souvenirs/parking/boat moorage revenue increased by $2.7 million in 2014 from This increase is due to having the football team back at Husky Stadium. In 2013, there was no boat moorage, football parking, football food concession, and a much smaller football souvenir revenue. In 2013, the revenue decreased by $927 thousand from This was mainly due to the football team playing home games at Century Link Field and therefore there was less or no revenue for boat moorage, game day parking, food concession and souvenirs. Contributions related to noncapital gifts decreased by $2.6 million in 2014 from The majority of the decrease ($3.9 million) was for payments for the Don James Center received in This was offset by an increase in other seat related contributions for football premium seating in 2014 from There was a $3.5 million increase in 2013 from In 2013, $6.2 million of this increase was for payments for football premium seating that were received in The main reason for the increase in contributions from 2012 was the payments received for the Don James Center. Investment income increased by $289 thousand in 2014 after a $150 thousand increase in Investment income is earned on two categories including investments in the CEF and short-term investments with the activity described as follows: Investment income in the CEF increased by $141 thousand in 2014 and $108 thousand in 2013 mainly due to an increase in the balance held in the CEF during these periods. Short-term investments received 2.0% distributions in 2014, 2013, and Since the returns were the same for each year, the change in the average investment balances accounted for any change in investment income. In 2014 and 2013, there was an increase of gain on investments of $2.6 million and $5.6 million, respectively due to the increased value of long-term investments and endowment funds. In 2012, there was a loss and was therefore shown in a separate caption. University funded tuition waivers increased by $214 thousand in 2014 due to the impact of increasing tuition rates. Capital gifts were $12.3 million in 2012, $7.8 million in 2013, and $11.1 million in The 2012, 2013, and 2014 gifts are mostly for the Husky Stadium renovation project. Endowment gifts increased by $3.9 million in 2014 to a total of $5.7 million from the $1.8 million received in The total received in 2012 was $2.9 million. 8 (Continued)

129 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Management s Discussion and Analysis Expenses and Losses The following table summarizes expenses and losses for the years ended June 30, 2014, 2013, and 2012: Expenses and losses summary (In thousands) Salaries and wages $ 26,786 23,948 24,070 Payroll taxes and employee benefits 7,155 6,905 6,216 Athletic student aid 11,806 10,894 10,066 Guarantees paid to visiting teams 1,593 1,929 3,111 Team travel 5,595 5,926 4,873 Day of game 7,156 4,977 4,602 Direct facilities, maintenance, and utilities 4,455 2,354 2,303 Advertising ,381 Uniforms and supplies 6,046 4,966 4,822 Training table 1,643 1,243 1,146 Department relations Banquets and special events Depreciation 17,598 5,877 4,610 Noncapitalized equipment and repairs 8,485 2,977 2,110 Institutional overhead 2,454 2,180 1,605 Other 9,424 9,140 8,588 Total operating expenses 112,180 85,063 80,553 Loss on investments 2,658 Loss on disposal of capital assets ,132 Interest expense 12, Total nonoperating expenses and losses 12, ,915 Total $ 124,652 85,191 86,468 Following are comments about the changes in expenses highlighted by the expenses and losses summary: Operating expenses increased from $80.6 million in 2012 to $85.1 million in 2013 and to $112.2 million in Reasons for the changes in operating expenses are explained below. Salaries and wages increased by $2.8 million in 2014 from 2013 due to full turnover in football staff, an increase in the number of ICA full-time employees, and salary increases for both professional and classified staff. Salaries and wages decreased $122 thousand in 2013 from 2012 due mostly to games being held at Century Link field during the renovation of Husky Stadium and Century Link paid the salaries of the event staff. 9 (Continued)

130 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Management s Discussion and Analysis Payroll taxes and employee benefits increased by $250 thousand in 2014 from 2013 and decreased by $689 thousand in 2013 from Since payroll taxes and employee benefits are a percentage of salaries and wages, the impact from increases in salaries and wages was partially offset by decreases in the percentage charged. There were decreases in the percentages charged for employee benefit load rates in The percentages charged to ICA on professional and contract staff salaries increased from 33.6% in 2012 to 34.0% in 2013 and decreased to 30.9% in The percentage increased from 33.4% in 2012 to 37.7% in 2013 and decreased to 35.3% in 2014 for classified staff salaries. The smaller amount spent on classified staff salaries compared to professional and contract staff salaries only had a small impact on increasing the total amount of payroll taxes and employee benefits paid. The percentages charged on hourly staff, overtime, and additional compensation for contract staff increased from 14.9% in 2012 to 16.5% in 2013 and decreased to 15.2% in Athletic student aid increased by $912 thousand in 2014 from 2013 due to rate increases for out of state tuition and increases for room and board. The increases in 2014 were 0% for in-state tuition and 7% for out of state tuition. Athletic student aid increased by $1.0 million in 2013 from 2012 due a modest increase in out of state tuition and room and board. Guarantees paid to visiting teams fluctuate due to the difference in the nonconference football game schedule. Team travel decreased by $331 thousand in 2014 from 2013, due to fewer teams participating in foreign tours in Team travel increased by $1.1 million in 2013 from 2012, due to an increase in airfare and ground transportation costs and the fact that several teams went on foreign tours in Day of game increased by $2.2 million in 2014 from 2013 mostly due to the home football games being played back in Husky Stadium for the 2013 season. Day of game increased by $375 thousand in 2013 from 2012 mostly due to the rental of Century Link field for home football games for the 2012 season. Depreciation expense increased $11.7 million in 2014 from 2013 mostly due to the completion of the renovation of Husky Stadium. In 2013, depreciation expense increased $1.3 million due to the purchase of updated scoreboards. Noncapitalized equipment and repairs increased by $5.5 million in 2014 and by $867 thousand in 2013, primarily due to additional maintenance costs related to the Husky Stadium renovation and Husky Ballpark projects. There was a $2.7 million nonoperating loss on investments in 2012 due to lower market value at year-end. Unrealized gains on investments due to higher market value were shown as revenue in 2014 and Loss on disposal of capital assets decreased $41 thousand and $3.1 million in 2014 and 2013, respectively. There was a large loss in 2012 for asset retirement, as a portion of Husky Stadium that had not yet been fully depreciated was demolished to renovate Husky Stadium. Other expenses increased $284 thousand in 2014 from 2013 due to additional costs for the Pac-12 Conference Office assessment. Other expenses increased $552 thousand in 2013 from 2012 due to additional costs for the Pac-12 Conference Office assessment and the ticket expense for the Las Vegas Bowl. 10 (Continued)

131 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Management s Discussion and Analysis Operating Loss There were operating losses of approximately $41.4 million in 2014, $31.6 million in 2013, and $25.6 million in There were sufficient nonoperating revenues from contributions, investment income, and University funded tuition waivers to cover the operating losses for 2014 and Nonoperating revenues would also have covered the operating loss for 2012, if not for the unrealized loss on investments. Economic Factors Affecting the Future The greatest factor that determines the amount of gate revenues and contributions for Intercollegiate Athletics is having winning seasons for the football team. Football revenue supports the operations of all 22 Intercollegiate Athletic programs. Additionally, an economic downturn would have a negative financial impact on Athletic programs. 11

132 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Statements of Net Position Assets Current assets: Cash and cash equivalents in the University of Washington Invested Funds Pool (note 2) $ 10,860,846 16,403,994 Accounts receivable 6,917,350 4,702,650 Accounts receivable scoreboard lease proceeds 3,950,993 Prepaid expenses 1,292, ,071 Total current assets 19,070,892 26,030,708 Noncurrent assets: Investments: University of Washington Consolidated Endowment Fund (note 2) 25,712,306 22,633,552 Endowments (note 2) 55,258,834 44,537,345 Advances to University for capital projects 1,642,333 2,292,420 Capital assets, less accumulated depreciation of $84,369,280 and $66,919,580 in 2014 and 2013, respectively (note 3) 378,330, ,023,478 Total noncurrent assets 460,943, ,486,795 Total assets $ 480,014, ,517,503 Liabilities and Net Position Current liabilities: Accounts payable $ 4,092,994 5,022,472 Accrued salaries and vacation payable 6,019,184 5,281,963 Admission taxes payable 843, ,121 Accrued interest payable 16 6,823 Unearned income 18,868,128 19,846,911 Capitalized equipment lease payable, current portion (note 5) 1,448, ,039 Internal lending program payable, current portion (note 4) 3,140,833 1,197,396 Total current liabilities 34,413,225 33,120,725 Noncurrent liabilities: Payable to University for construction in progress and retainage 8,375,341 22,721,549 Capitalized equipment lease payable, net of current portion (note 5) 8,589,559 8,094,431 Internal lending program payable, net of current portion (note 4) 251,799, ,552,545 Total noncurrent liabilities 268,764, ,368,525 Total liabilities 303,177, ,489,250 Net position: Net investment in capital assets 104,975, ,658,518 Restricted: Nonexpendable (note 2) 43,832,271 35,816,877 Expendable: Expendable endowment principal (note 2) 1,040, ,059 Expendable endowment gains 10,385,824 7,780,409 Other expendable 4,470,400 3,793,780 Unrestricted 12,131,688 16,038,610 Total net position 176,836, ,028,253 Total liabilities and net position $ 480,014, ,517,503 See accompanying notes to financial statements. 12

133 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Statements of Revenue, Expenses, and Changes in Net Position Years ended Operating revenue: Gate ticket sales $ 28,829,759 20,480,655 NCAA/conference distributions 24,935,473 22,452,934 Sponsorships 10,667,861 7,951,826 Concessions, souvenirs, parking, and boat moorage 3,408, ,327 Trademarks and licensing 653, ,639 Facility income 1,461, ,789 Other 820, ,940 Total operating revenue 70,776,600 53,509,110 Operating expenses: Salaries and wages 26,786,004 23,948,398 Payroll taxes and employee benefits 7,154,844 6,905,130 Athletic student aid 11,806,273 10,893,865 Guarantees paid to visiting teams 1,593,218 1,929,254 Team travel 5,595,101 5,925,748 Day of game expenses 7,155,949 4,977,229 Direct facilities, maintenance, and utilities 4,454,956 2,353,903 Advertising 530, ,135 Uniforms and supplies 6,046,233 4,966,204 Training table 1,643,129 1,243,060 Department relations 886, ,396 Banquets and special events 566, ,938 Depreciation 17,597,921 5,876,753 Noncapitalized equipment and repairs 8,484,641 2,976,642 Institutional overhead 2,454,410 2,179,521 Medical expenses 955, ,457 Fund-raising, marketing, and promotions 571, ,611 Recruiting 423, ,972 Equipment 5,741 6,980 Other 7,465,978 7,119,127 Total operating expenses 112,179,698 85,063,323 Operating loss (41,403,098) (31,554,213) Nonoperating revenues (expenses): Contributions 24,031,167 26,598,770 Investment income (expense) on Invested Funds 143,931 (3,545) Investment income on CEF 1,773,807 1,632,550 Gain on investments 8,273,818 5,630,380 Loss on disposal of capital assets (5,168) (45,600) University funded tuition waivers 3,549,679 3,335,999 Amortization of debt refinance gain 85, ,768 Interest expense (12,466,888) (81,875) Total nonoperating revenues (expenses) 25,385,964 37,211,447 Income (loss) before other revenues (16,017,134) 5,657,234 Other revenues: Capital gifts 11,092,450 7,759,091 Gifts to permanent endowments 5,733,305 1,815,974 Total other revenues 16,825,755 9,575,065 Increase in net position 808,621 15,232,299 Net position: Net position at beginning of year 176,028, ,795,954 Net position at end of year $ 176,836, ,028,253 See accompanying notes to financial statements. 13

134 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Statements of Cash Flows Years ended Cash flows from operating activities: Gate ticket sales $ 27,476,928 27,853,043 NCAA/conference distributions 22,191,935 20,861,606 Sponsorships 8,085,108 4,875,924 Concessions and souvenirs 3,456, ,390 Trademarks and licensing 843, ,211 Facility income 1,500, ,812 Other 794, ,898 Payments to suppliers (46,860,864) (32,920,639) Payments to employees (26,054,075) (23,396,169) Payments for benefits (7,154,844) (6,905,130) Payments for scholarships (11,813,876) (10,906,979) Net cash used in operating activities (27,535,076) (18,108,033) Cash flows from noncapital financing activities: Contributions, excluding permanent endowments and capital 24,031,167 26,891,972 Contributions to permanent endowments 5,644,882 1,815,974 University funded tuition waivers 3,549,679 3,335,999 Net cash provided by noncapital financing activities 33,225,728 32,043,945 Cash flows from capital and related financing activities: Capital gifts received 11,092,450 7,759,091 Proceeds from Internal Lending Program 48,448, ,262,327 Proceeds from Equipment Lease 6,033,180 4,942,477 Acquisition and construction of capital assets (58,605,907) (170,070,378) Principal paid on capital debt (2,109,272) (1,052,604) Interest paid on capital debt (12,473,695) (85,448) Net cash used in capital and related financing activities (7,615,066) (4,244,535) Cash flows from investing activities: Purchases of investments (6,143,305) (2,410,974) Sale of investments 616,879 Investment income 1,907,692 1,605,482 Net cash used in investing activities (3,618,734) (805,492) Net (decrease) increase in cash and cash equivalents (5,543,148) 8,885,885 Cash and cash equivalents at beginning of year 16,403,994 7,518,109 Cash and cash equivalents at end of year $ 10,860,846 16,403,994 Reconciliation of operating loss to net cash used in operating activities: Operating loss $ (41,403,098) (31,554,213) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation expense 17,597,921 5,876,753 Changes in assets and liabilities: Increase in accounts receivable (2,116,234) (1,667,484) Decrease (increase) in prepaid expenses (319,625) 229,169 Increase (decrease) in accounts payable (929,478) 1,073,815 Increase (decrease) in unearned income (978,783) 7,066,816 Increase in accrued salaries and vacation payable 737, ,229 Increase (decrease) in admissions taxes payable (123,000) 314,882 Net cash used in operating activities $ (27,535,076) (18,108,033) Supplemental disclosure of noncash activities: Donated supplies $ 2,625,451 2,525,000 See accompanying notes to financial statements. 14

135 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements (1) Organization and Summary of Significant Accounting Policies (a) Organization The University of Washington Department of Intercollegiate Athletics (Department or ICA) is an auxiliary enterprise within the University of Washington (the University). The records of the Department are maintained as part of the general records of the University. (b) Basis of Presentation The financial statements of the Department have been prepared in accordance with the Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The Department is reporting as a special purpose government engaged in business-type activities (BTA). In accordance with BTA reporting, the Department presents a management s discussion and analysis, statements of net position, statements of revenues, expenses, and changes in net position, statements of cash flows, and notes to the financial statements. The financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. The Department reports capital assets net of accumulated depreciation (as applicable) and reports depreciation expense in the statements of revenues, expenses, and changes in net position. In June 2012, the GASB approved Statement No. 68, Accounting and Financial Reporting for Pensions, which will take effect in the fiscal year ending June 30, This Statement requires governments providing defined benefit pensions to their employees to recognize their long-term obligation for pension benefits as a liability for the first time, along with the associated assets which have been set aside to fund the plan. Since the University participates in several cost sharing pension plans which are administered by the state of Washington Department of Retirement Systems (DRS), this statement will require the University to recognize its proportionate share of the state-wide net pension liability for each of the plans in which it participates. The Statement also eliminates the method of amortizing the liability balances over several years, and instead requires full recognition of the net liability upon implementation. The requirement of GASB Statement No 68 to record a proportionate share of retirement plan unfunded pension liabilities may negatively impact the University s future unrestricted net position. The University is currently analyzing the impact of this Statement. (c) Capital Assets Expenditures for equipment and repairs that represent normal replacement of such equipment and routine maintenance of the buildings are expensed as incurred. Capital expenditures for facilities and equipment funded by the Department are reflected as capital assets on the Department s balance sheets. Buildings and equipment are stated at cost, or if acquired by gift, at fair market value at the date of the gift. Additions, replacements, major repairs, and renovations are capitalized. Depreciation is computed 15 (Continued)

136 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements using the straight-line method over the estimated useful lives of the assets, generally years for building components, years for infrastructure and land improvements, and 5 7 years for equipment. (d) (e) (f) Advances to University for Capital Projects Advances to University for capital projects represent the difference between the cash paid and the expenditures incurred by the University for various capital projects that are in process at year-end, which ICA expects to expense or capitalize in the next fiscal year. Payable to University for Construction in Progress and Retainage Construction in progress and retainage provided before year-end yet not paid by the Department is accrued as of year-end and recorded as a payable to the University. Unearned Income Funds received from the sale of tickets (which could be shared with visiting teams) for games to be played subsequent to June 30, 2014 are unearned. The Department s share of such receipts is recognized as income in the period in which the games are played, less any amount owed to visiting teams. At, unearned revenues consist of the following: Advance sales of football tickets $ 17,819,441 19,323,542 Advance sales for men s and women s basketball 284, ,789 Other unearned income 764,344 85,580 $ 18,868,128 19,846,911 (g) (h) Contributions Contributions are recorded as income when all conditions have been met. Sponsorships Sponsorships revenue for donated advertising and supplies is recognized as an exchange transaction and is recorded in income when the related advertising or supplies are received. The Department recorded $3.1 million in sponsorship revenue for these transactions in the years ended, respectively. (i) Income Taxes As a part of the University, the Department is exempt from federal income taxes, except to the extent of unrelated business taxable income. Unrelated business tax was not significant to the financial statements taken as a whole at. 16 (Continued)

137 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements (2) Cash and Cash Equivalents in the University of Washington Invested Funds Pool and Investments The Department s cash and investments are managed by the University through the Treasurer of the Board of Regents. The Department s funds on deposit with the University and nonendowment investments were invested in the University s Invested Funds Pool (IFP). The IFP is unrated and the principal balance in each account is available to be withdrawn at any time. Since the IFP funds can be withdrawn at any time, the IFP funds are recorded on the financial statements as cash and cash equivalents. The IFP funds are invested in highly liquid, shorter-term investments. For funds invested in the IFP, the University credits the Department with interest at rates established at the University s discretion (2.0% for fiscal year 2014 and 2013) on the average month-end balance of IFP funds. The Department s cash and cash equivalents and University IFP investments represent 1.0% and 2.5% of the IFP balance as of, respectively. The Department purchases or sells units in the University s Consolidated Endowment Fund (CEF) on the basis of a per unit valuation of the CEF at fair value on the last business day of the calendar quarter. Income is distributed by the University based on the number of units held. The Department records its permanent endowments at fair value. Net appreciation/depreciation in the fair value is recorded as gain or loss on investments in the statements of revenue, expenses, and changes in net assets. For the investment portion of the CEF funds, the principal balance can be withdrawn at the end of each quarter. The Department earned investment income on these investment funds based on the performance of the University s CEF funds net of investment management and University administrative fees. The total return on the investments portion of the CEF funds for the years ended was approximately 15.8% and 13.5%, respectively. During fiscal year 2011, the Board of Regents adopted a new long-term spending policy for the CEF replacing the interim spending policy, which was effective in fiscal year Under the new policy, quarterly distributions to programs are based on an annual percentage rate of 4.0%, applied to the five-year rolling average of the CEF s market valuation. The new policy was effective with the December 2010 quarterly distributions with the five-year averaging period implemented incrementally. The administrative fee of 1.0% supporting campus wide fund-raising and stewardship activities (0.8%) and offsetting the internal cost of managing endowment assets (0.2%) continues, but is now based on a five-year average value similar to program distributions. The Department s endowments represent 1.9% of the CEF balance as of. 17 (Continued)

138 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements At, the fund balance of the Endowment and Expendable Endowment funds stated at fair value comprised the following: Expendable endowments: Graham* $ 421, ,442 Spence* 619, ,617 Endowments (including expendable gains) 54,218,095 43,597,286 Total $ 55,258,834 44,537,345 * Expenditure of principal is permitted under certain circumstances. The Department received $5,733,305 and $1,815,974 in endowment gifts in 2014 and 2013, respectively, which is invested in the CEF. University of Washington Investment All of the Department s cash and cash equivalents are invested in the University of Washington s Invested Funds Pool. The following information is for the entire pool and are audited disclosures as a part of the University of Washington audit. The Board of Regents of the University of Washington is responsible for the management of the University s investments. The Board establishes investment policy, which is carried out by the Chief Investment Officer. The University of Washington Investment Committee, comprising Board members and investment professionals, advises on matters relating to the management of the University s investment portfolios. The composition of the carrying amounts of investments by type at is listed below. University investments Carrying value Investment type (Dollars in thousands) Cash equivalents $ 16, ,781 Fixed income 1,972,553 1,655,711 Equity 1,672,262 1,287,084 Nonmarketable alternatives 349, ,632 Absolute return 509, ,416 Real assets 219, ,792 Miscellaneous 4,724 5,917 Total investments $ 4,744,819 4,138,333 Investment Pools The University combines most short-term cash balances into the Invested Funds Pool. At June 30, 2014, the Invested Funds Pool totaled $1,606,152,000 compared to $1,564,368,000 at June 30, 18 (Continued)

139 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements The Invested Funds Pool also owns units in the Consolidated Endowment Fund valued at $668,863,000 on June 30, 2014 and $468,187,000 on June 30, By University policy, departments with qualifying funds in the Invested Funds Pool receive distributions based on their average balances and on the type of balance. Campus depositors received 2% in fiscal years 2014 and Endowment operating and gift accounts received 3% in both fiscal years 2014 and The difference between the actual earnings of the Invested Funds Pool and the calculated distributions is used to support activities benefiting all University departments. The majority of the endowed funds are invested in a pooled fund called the Consolidated Endowment Fund (CEF). Individual endowments purchase units in the pool on the basis of a per unit valuation of the CEF at fair value on the last business day of the calendar quarter. Income is distributed based on the number of units held. RCW of the Washington State Code and the Uniform Prudent Management of Institutional Funds Act allow for total return expenditure under comprehensive prudent standards. Interest Rate Risk The University manages interest rate risk through its investment policies and the investment guidelines established with each manager. Each fixed-income manager is assigned a maximum boundary for duration as compared to the manager s relevant benchmark index. The goal is to allow ample freedom for the manager to perform, while controlling the interest rate risk in the portfolio. The weighted average effective duration of the University s fixed-income portfolio was 1.91 and 2.95 years at June 30, 2014 and 2013, respectively. Credit Risk Fixed-income securities are subject to credit risk, which is the risk that the issuer or other counterparty to a financial instrument will not fulfill its obligations, or that negative perceptions of the issuer s ability to make these payments will cause prices to decline. Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The University Investment Policies limit fixed-income exposure to investment grade assets. The Investment Policy for the Invested Funds cash pool requires each manager to maintain an average quality rating of AA as issued by a nationally recognized rating organization. The Invested Funds liquidity pool requires each manager to maintain an average quality rating of A and to hold 25% of their portfolios in government and government agency issues. The Investment Policy for the CEF reflects its long-term nature by specifying average quality rating levels by individual manager, but still restricting investment to investment grade credits. Duration and credit risk figures at exclude $49,348,000 and $53,541,000, respectively, of fixed-income securities held outside the CEF and the Invested Funds Pool. These amounts make up 2.48% and 2.80%, respectively, of the University s fixed income investments (including cash equivalents), and are not included in the duration figures detailed below. 19 (Continued)

140 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements The composition of the fixed-income securities at, along with credit quality and effective duration measures is summarized below: Fixed income credit quality and effective duration Investment Noninvestment Not Duration Investments U.S. government grade grade rated Total (in years) (Dollars in thousands) 2014: U.S. Treasuries $ 877, , U.S. government agency 597, , Mortgage backed 103,105 93, , Asset backed 178,075 8,495 1, , Corporate and other 79, , Total $ 1,475, , ,933 1,281 1,940, Fixed income credit quality and effective duration Investment Noninvestment Not Duration Investments U.S. government grade grade rated Total (in years) (Dollars in thousands) 2013: U.S. Treasuries $ 730, , U.S. government agency 661, , Mortgage backed 98,779 94,196 9, , Asset backed 164,394 9,743 3, , Corporate and other 86, , Total $ 1,391, , ,939 13,603 1,858, (Continued)

141 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements Foreign Currency Risk The University s Investment Policies permit investments in international equity and other asset classes, which can include foreign currency exposure. The University held non-u.s. denominated securities at of $1,029,318,000 and $771,070,000, respectively. Investments denominated in foreign currency June (Dollars in thousands) Euro (EUR) $ 156, ,213 Chinese Renminbi (RMB) 126,848 73,109 Indian Rupee (INR) 100,451 65,686 Japanese Yen (JPY) 65,017 45,735 Brazilian Real (BRL) 56,611 47,956 Russian Ruble (RUB) 56,517 47,302 British Pound (GBP) 54,281 51,193 Hong Kong Dollar (HKD) 50,663 24,285 South Korean Won (KRW) 49,150 29,477 Canadian Dollar (CAD) 41,888 27,109 Swiss Franc (CHF) 39,900 36,888 Taiwanese Dollar (TWD) 30,894 23,796 Philippine Peso (PHP) 18,974 22,737 Indonesian Rupiah (IDR) 14,732 19,301 Remaining Currencies 166, ,283 Total $ 1,029, ,070 (3) Capital Assets Capitalized asset activity for the year ended June 30, 2014 is summarized as follows: Balance at Balance at June 30, Additions/ June 30, 2013 transfers Retirements 2014 Buildings $ 143,788, ,968, ,756,688 Furniture, fixtures, and equipment 11,127,098 2,364,724 (153,389) 13,338,433 Construction in progress* 263,027,618 (261,423,279) 1,604,339 Total 417,943,058 44,909,791 (153,389) 462,699, (Continued)

142 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements Balance at Balance at June 30, Additions/ June 30, 2013 transfers Retirements 2014 Less accumulated depreciation: Buildings $ 62,003,886 15,116,519 77,120,405 Furniture, fixtures, and equipment 4,915,694 2,481,402 (148,221) 7,248,875 * Nondepreciable Total accumulated depreciation 66,919,580 17,597,921 (148,221) 84,369,280 Capital assets, net $ 351,023,478 27,311,870 (5,168) 378,330,180 Capitalized asset activity for the year ended June 30, 2013 is summarized as follows: Balance at Balance at June 30, Additions/ June 30, 2012 transfers Retirements 2013 Buildings $ 143,542, , ,788,342 Furniture, fixtures, and equipment 5,082,680 6,900,354 (855,936) 11,127,098 Construction in progress* 97,157, ,870, ,027,618 Total 245,782, ,016,547 (855,936) 417,943,058 Less accumulated depreciation: Buildings 57,980,413 4,023,473 62,003,886 Furniture, fixtures, and equipment 3,854,879 1,871,151 (810,336) 4,915,694 * Nondepreciable Total accumulated depreciation 61,835,292 5,894,624 (810,336) 66,919,580 Capital assets, net $ 183,947, ,121,923 (45,600) 351,023,478 (4) Internal Lending Program In February 2012, ICA began drawing money from the ILP for the costs related to renovating Husky Stadium. The Board of Regents at their November 18, 2010 meeting approved ICA to use the ILP for up to $250 million in project and capitalized interest costs for the renovation of Husky Stadium. On November 11, 2011, the Board of Regents approved to increase ICA s use of the ILP to $261.5 million for the costs of renovating Husky Stadium and adding a Sports Medicine and Sport Performance Center. Any amounts drawn 22 (Continued)

143 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements from the ILP greater than $261.5 million will be funded by the Department. At the end of June 2014, ICA had drawn $254.9 million from the ILP relating to the construction of the Husky Stadium renovation and Husky Ballpark. Capitalized interest at June 30, 2014 was $8.5 million. In addition, ICA has a payable to University for construction in progress of $8.4 million as of June 30, 2014 in project costs that will be funded by the Department. The purpose of the ILP is to lower the University s overall cost of capital and provide internal borrowing units with a stable and predictable borrowing rate. The ILP will make loans to internal borrowers at a uniform internal lending rate. These loans will be funded through the issuance of University General Revenue bonds and notes. ILP program policies include a provision for a rate stabilization reserve and a provision for rate adjustments if necessary. Under the terms of the ILP, rate adjustments will apply to all outstanding debt obligations, including debt issued prior to the ILP implementation. The ILP lending rate will be reviewed annually, and a preliminary indication of a rate adjustment will be announced to ILP participants 12 months in advance of the effective date. Final rate adjustments require approval by the Board of Regents. Future principal and interest payments due through maturity dates are as follows: Principal Interest Years ending June 30: 2015 $ 3,140,833 12,781, ,611,443 13,758, ,815,427 13,555, ,030,362 10,804, ,257,705 13,112,576 Thereafter 236,084, ,383,212 $ 254,940, ,396,514 Internal Lending Program activity for the years ended is summarized as follows: Balance as of June 30, 2012 $ 54,684,986 Additions 154,262,327 Reductions (1,197,372) Balance as of June 30, ,749,941 Additions 48,448,178 Reductions (1,257,740) Balance as of June 30, 2014 $ 254,940, (Continued)

144 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements (5) Capital Lease Future minimum lease payments under capital lease and the present value of the net minimum lease payments as of June 30, 2014 are as follows: Future payments Years ending June 30: 2015 $ 1,653, ,653, ,605, ,077, ,934 Thereafter 3,991,735 Total minimum lease payments 10,979,857 Less amount representing interest cost 941,349 Present value of minimum payments $ 10,038,508 Equipment under capital lease are as follows: Balance at Balance at June 30, June 30, 2013 Additions Retirements 2014 Equipment $ 5,995,767 1,678,887 7,674,654 Total 5,995,767 1,678,887 7,674,654 Less accumulated depreciation: Equipment 1,378,053 2,040,156 3,418,209 Total accumulated depreciation 1,378,053 2,040,156 3,418,209 Leased capital assets, net $ 4,617,714 (361,269) 4,256,445 (6) Related-Party Transactions The University provides support to the Department by performing the following services: Providing use of University buildings and equipment 24 (Continued)

145 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements Serving as the depository, purchasing, and disbursing agent Providing certain administrative and accounting services In addition, the Department purchases operating and office supplies and other services from the University and is allocated institutional overhead from the University for services provided and payment for utility costs. The institutional overhead allocated from the University for fiscal years 2014 and 2013 was $2,454,410 and $2,179,521, respectively. The Department is covered by the University s self-insurance program and is responsible for the first $100,000 of costs in general, automobile, and employment practices liability claims. Payments over $100,000 are covered by the University s self-insurance program and excess carriers, except that in claims related to coaches contracts or the acts of trainers and non-university physicians to the athletes medical services program, all costs are the exclusive responsibility of the Department. (7) Pension Plan The University offers two contributory plans in which Department employees can participate: the Washington State Public Employees Retirement System (PERS) plan, a defined-benefit retirement plan; and the University of Washington Retirement Plan (UWRP), a defined-contribution plan with supplemental payment, when required. The Department s employees participate in the PERS, UWRP, and Other Postemployment Benefits (OPEB). The Department is allocated a cost for the participation in these plans. The cost is included in the benefits load rate set by the University in calculating its fringe benefit expense and is applied on a per employee basis and is not a significant dollar amount. (a) Public Employees Retirement System Plan Description The University contributes to PERS, a cost sharing multiple employer defined-benefit pension plan administered by the State of Washington Department of Retirement Systems. PERS Plan 1 provides retirement and disability benefits and minimum benefit increases beginning at age 66 to eligible nonacademic plan members hired prior to October 1, PERS Plans 2 and 3 provide retirement and disability benefits and a cost of living allowance to eligible nonacademic plan members hired on or after October 1, In addition, PERS Plan 3 has a defined-contribution component, which is fully funded by employee contributions. The authority to establish and amend benefit provisions resides with the legislature. The PERS issues a publicly available financial report that includes financial statements and required supplementary information for PERS. The report may be obtained by writing to the Department of Retirement Systems, P.O. Box 48380, Olympia, Washington , or visiting Funding Policy The Office of the State Actuary, using funding methods prescribed by statute, determines actuarially required contribution rates for PERS. Plan 1 members are required to contribute 6% of their annual covered salary. Contributions for Plan 2 members are determined by the aggregate method and may 25 (Continued)

146 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements vary over time. The contribution rate for Plan 2 employees at was 4.6% and 4.6%, respectively. PERS 3 members can choose contributions ranging from 5% to 15% of salary, based on the age of the member. The defined-contribution benefit for PERS 3 will depend on the member s contributions, the investment earnings on those contributions, and if an annuity is taken, the age at which the member receives payment. The contribution rate for the University at June 30, 2014 and 2013, for each of PERS Plans 1, 2, and 3 was 9.21% and 7.21%, respectively. The University s contributions to PERS on the Department s behalf for the years ended was $465,750 and $300,558, respectively, which was equal to the annual required contributions (ARC) for the year. (b) University of Washington Retirement Plan Plan Description Professional staff and certain other salaried employees are eligible to participate in the UWRP, a defined-contribution plan administered by the University. Contributions to the plan are invested in annuity contracts or mutual fund accounts offered by one or more fund sponsors. Employees have at all times a 100% vested interest in their accumulations. Benefits from fund sponsors are available upon separation or retirement at the member s option. RCW 28.B et. seq. assigns the authority to the Board of Regents to establish and amend benefit provisions. The plan has a supplemental payment component that guarantees a minimum retirement benefit based upon a one-time calculation at each employee s retirement date. The University makes direct payments to qualifying retirees when the retirement benefits provided by the fund sponsors do not meet the benefit goals. Funding Policy Employee contribution rates, based on age, are 5%, 7.5%, or 10% of salary. The University matches the contributions of employees. Within parameters established by the legislature, contribution requirements may be established or amended by the Board of Regents. Employee and employer contributions for the years ended were each $926,300 and $789,633, respectively. This plan is closed to new entrants as of February 28, As of June 30, the University has set aside $177,019,000 in 2014 and $148,270,000 in These funds do not meet the technical definition of Plan Assets since they have not been segregated and restricted in a trust, or equivalent arrangement. 26 (Continued)

147 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Notes to Financial Statements (c) Other Postemployment Benefits (OPEB) The University funds OPEB obligations at a university-wide level on a pay-as-you-go basis. Disclosure information, as required under GASB Statement No. 45 (GASB 45), Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, does not exist at the Department level, and as a result, the Actuarial Accrued Liability (AAL) is not available for auxiliary entities. The University is ultimately responsible for the obligation; therefore, the (ARC) is not recorded on the Department s financial statements. (8) Commitments and Contingencies The Department is subject to various claims and lawsuits that are covered by the University s self-insurance fund, subject to a deductible of $100,000 per occurrence. (9) Subsequent Events The Department has evaluated subsequent events from the statements of net position date through November 12, 2014, the date at which the financial statements were available to be issued. On September 30, 2014, the University entered into a settlement agreement with a former coach within the Department. As part of the settlement, the Department will receive a settlement payment of $1.25 million, which will be paid in quarterly installments beginning on December 31, 2014 and ending on December 31, In accordance with the settlement agreement, these payments settle all claims. 27

148 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Operating and Other Revenue by Specific Function Year ended June 30, 2014 Schedule 1 Men s Men s Women s Other sports Administration football basketball basketball Men s Women s and other Total Gate ticket sales revenue: Ticket sales for home events $ 25,666,862 3,014, , , ,963 29,548,051 Admission taxes (1,222,944) (143,465) (9,147) (12,705) (19,427) (1,407,688) Ticket-processing fees 290,065 34,759 5,371 4,814 13, ,084 24,733,983 2,906, , , ,611 28,488,447 University s share of gate revenue for away games 275,000 15,010 51, ,312 Total gate ticket sales revenue 25,008,983 2,906, , , ,913 28,829,759 NCAA/conference distributions: PAC-12 television share 14,287,635 2,483,247 16,770,882 PAC-12 rose/other bowl shares 2,057,239 2,057,239 Conference postseason other 725, ,733 Bowl Participation 1,000,000 1,000,000 NCAA MBB tournament 1,396,333 1,396,333 Football Pac-12 Championship Game 88,982 88,982 MBB PAC-12 tournament (32,936) (32,936) Pac-12 Network Share 978, ,596 1,150,639 Other 1,778,601 1,778,601 Total NCAA/conference distributions 19,137,632 4,019,240 1,778,601 24,935,473 Royalties, advertisements, and sponsorships: Sponsorships 5, ,749 54,101 7,349,635 7,511,485 Donated advertising 530, ,925 Trademarks and licensing 653, ,630 Donated supplies 860, , , , , ,451 2,625,451 Total royalties, advertisements, and sponsorships 865, , , , ,901 8,712,641 11,321,491 Contributions 19,115,151 2,063,148 73, , ,593 1,436,800 24,031,167 Capital gifts 11,092,450 11,092,450 Gifts to permanent endowments 5,733,305 5,733,305 Gain on investments 8,273,818 8,273,818 Investment income, net 1,917,738 1,917,738 University funded tuition waivers 3,549,679 3,549,679 Concessions, souvenirs, parking, and boat moorage 2,912,034 97,658 24,910 16,971 27, ,803 3,408,008 Facility income 1,461,554 1,461,554 Amortization of debt refinance gain 85,618 85,618 Other 72, , , , ,315 Total revenue $ 67,111,614 9,246, ,423 1,873,412 2,162,315 44,619, ,460,375 See accompanying independent auditors report. 28

149 UNIVERSITY OF WASHINGTON DEPARTMENT OF INTERCOLLEGIATE ATHLETICS Operating Expenses and Other Deductions by Specific Function Year ended June 30, 2014 Schedule 2 Facilities Department maintenance relations Men s Men s Women s Other sports Postseason and event and visiting football basketball basketball Men s Women s activity Administration management recruits Total Operating expenses: Salaries and wages $ 7,358,872 2,945, ,312 1,756,952 2,684, ,041 9,206,178 1,627,238 65,711 26,786,004 Payroll taxes and employee benefits 1,962, , , , ,000 39,488 2,651, ,535 12,156 7,154,844 Athletic student aid 3,622, , ,336 2,215,353 3,989, , ,350 11,806,273 Guarantees paid to visiting teams 825, ,333 56,991 69,104 43,790 1,593,218 Team travel 1,290, , , ,665 1,133,856 1,274, ,940 35,239 5,595,101 Day of game expenses 1,715, , , , ,064 10, , ,290 3,197,950 7,155,949 Direct facilities, maintenance, and utilities 126,051 25,254 37,245 2,671,010 1,081, ,200 4,454,956 Donated advertising 530, ,925 Uniforms and supplies 1,249, ,397 39, , , , , ,384 59,341 3,446,233 Donated supplies 860, , , , , ,000 2,600,000 Institutional overhead 2,454,410 2,454,410 Medical expenses 941,554 13, ,476 Fund-raising, marketing, and promotions 1,465 2,422 7, ,544 87, ,910 Recruiting 423, ,896 Equipment 5,741 5,741 Training table 916,510 18,791 19, , ,008 88,542 82,773 27,827 1,643,129 Department relations 31,457 4,437 2,773 37,016 48,224 40,555 38, , ,743 Banquets and special events 26,405 15,030 6,565 59,912 30,994 98, , ,350 Depreciation 17,597,921 17,597,921 Noncapitalized equipment and repairs 8,484,641 8,484,641 Other 568, , , , , ,210 4,433,889 33,252 1,145,454 7,465,978 Total operating expenses 20,553,016 5,872,523 2,604,767 7,134,588 10,940,070 1,998,917 43,957,516 12,314,026 6,804, ,179,698 Other deductions: Loss on disposal of capital assets 5,168 5,168 Interest expense 12,466,888 12,466,888 Total other deductions 12,466,888 5,168 12,472,056 Total operating expenses and other deductions $ 20,553,016 5,872,523 2,604,767 7,134,588 10,940,070 1,998,917 56,424,404 12,319,194 6,804, ,651,754 See accompanying independent auditors report. 29

150 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Financial Statements (With Independent Auditors Report Thereon)

151 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Table of Contents Page Independent Auditors Report 1 Management s Discussion and Analysis (Unaudited) 3 Basic Financial Statements: Statements of Net Position 18 Statements of Revenues, Expenses, and Changes in Net Position 19 Statements of Cash Flows 20 Notes to Financial Statements 21

152 KPMG LLP Suite Eighth Avenue Seattle, WA Independent Auditors Report The University of Washington UW Medicine Board: We have audited the accompanying financial statements of University of Washington Medical Center (UW Medical Center), which comprise the statements of net position as of, and the related statements of revenues, expenses and changes in net position, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Emphasis of Matter As discussed in note 1, the financial statements of UW Medical Center, a division of the University of Washington (the University), are intended to present the net position, the changes in net position and the cash flows of only that portion of the business-type activities of the University that are attributable to the transactions of UW Medical Center. They do not purport to, and do not, present fairly the net position of the University as of, the changes in its net position, or its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. Our opinion is not modified with respect to this matter. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

153 Opinion In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of UW Medical Center as of, and the results of its operations and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. Other Matter U.S. generally accepted accounting principles require that the Management s Discussion and Analysis on pages 3 through 17 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Seattle, Washington October 31,

154 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) The following discussion and analysis provides an overview of the financial position and activities of the University of Washington Medical Center (UW Medical Center), for the years ended June 30, 2014, 2013 and This discussion has been prepared by management and is designed to focus on current activities, resulting changes, and current known facts and should be read in conjunction with the audited financial statements and accompanying notes that follow this section. UW Medical Center is a division of the University of Washington (the University) and part of UW Medicine that includes: Harborview Medical Center (Harborview), Northwest Hospital & Medical Center (Northwest Hospital), Valley Medical Center (VMC), UW Physicians Network dba UW Neighborhood Clinics (UWNC), UW Physicians (UWP), the UW School of Medicine (the School), and Airlift Northwest (Airlift). Financial Highlights for Fiscal Year 2014 UW Medical Center recorded operating revenues of $967.7 million in fiscal year 2014, an increase of 5.1% from the prior year. UW Medical Center reported an increase in net position of $14.7 million in fiscal year The increase is primarily attributable to higher investment income due to UW Medical Center s equity investment in Seattle Cancer Care Alliance. Volumes in tertiary care areas such as transplant and neonatal intensive care were higher in the prior year, along with slight increase in admissions. UW Medical Center opened the Sports Medicine Center in Husky Stadium and the Eastside Specialty Clinic during 2014 as well as the first full year of operation for Phase 1 of the Montlake Tower, which increased capacity for oncology, Neonatal Intensive Care Unit and radiology services (In thousands) Total operating revenues $ 967, , ,548 Total operating expenses 935, , ,850 Operating income 32,540 34,880 61,698 Investment income, net 17,074 12,269 11,984 Interest expense (11,218) (10,642) (2,566) Other, net (24,300) (30,907) (35,090) Nonoperating expenses (18,444) (29,280) (25,672) Capital contributions and transfers Increase in net position 14,653 5,706 36,075 Net position, beginning of year 667, , ,103 Net position, end of year $ 682, , ,178 During fiscal year 2014, the Washington state Medicaid program was expanded which significantly increased the number of Medicaid enrollees receiving benefits. With the increase of eligible Medicaid enrollees, UW Medical Center has seen a decline in the number of charity care applicants as these applicants now are eligible for Medicaid. 3 (Continued)

155 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) UW Medical Center is continuing to invest in information technology. During 2014, UW Medicine implemented a specialty clinic computerized physician order system. UW Medical Center management implemented cost saving enterprise-wide initiatives through UW Medicine s process improvement program focusing on the standardization of high volume/high dollar medical supplies and equipment, revenue cycle and transformation of care. Factors Affecting the Future UW Medicine Strategic Planning Strategic Collaborations In September 2013, UW Medicine signed a strategic collaboration with PeaceHealth for UW Medicine to serve as PeaceHealth s complex tertiary and quaternary health system for specialty care not available in their community. The agreement will also allow both organizations to work together on improving the quality, safety and cost-effectiveness of care. The two organizations will remain legally independent and there is no change in the governance or mission of either organization. In March 2014, UW Medicine and Capital Medical Center (Olympia, WA) signed an agreement selecting UW Medicine as the healthcare system of choice for complex tertiary and quaternary care for Capital Medical Center patients. This strategic collaboration, effective April 1, will provide Capital Medical Center patients prompt access to the highest level of care for advanced services while allowing the organizations to work together to continue improving the quality, safety and cost-effectiveness of care in the South Sound. UW Medicine Accountable Care Network In 2014, UW Medicine formed an accountable care network (ACN) with certain other health care organizations and healthcare professionals in Western Washington to work together to assume responsibility for the healthcare of particular populations of patients to achieve the Triple Aim: improved healthcare experience for the individual, improved health of the population, and more affordable care. The UW Medicine Accountable Care Network will focus on keeping people healthy and out of the hospital by employing evidence-based preventive measures to identify and treat underlying health problems early before they become chronic conditions. UW Medicine and its Network members entered into agreements to provide health care services to employees of The Boeing Company beginning in January The arrangement provides an opportunity for shared savings between the ACN and Boeing based on achieving quality and financial benchmarks. If certain financial benchmarks are not attained, UW Medicine, along with contractually agreed upon risk sharing payments from its Network members, will pay Boeing based on the agreement. Employee Costs Rising employee benefit costs, particularly for healthcare and pensions, continue to impact UW Medical Center. Employer pension funding rates are expected to increase 9.2% in 2014 to 10.0% of covered salary in 2015, and are likely to continue increasing over the next few years. 4 (Continued)

156 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) UW Medicine Patients Are First UW Medicine is committed to its mission of improving the health of the public. Patients Are First was launched across UW Medicine as the organizational framework for delivering consistent quality and service excellence to every patient, every time. Through Patients Are First, UW Medicine creates better leaders, refines metrics to support systems of accountability, and provides employees and physicians with the tools, tactics, and reports to achieve its strategic outcomes. UW Medicine relies on the following four pillars as the foundation for building its Patients Are First culture: Focus on Serving the Patient & Family: serve all patients and family members with compassion, respect, and excellence Provide the Highest Quality Care: provide the highest quality, safest and most effective care to every patient, every time Become the Employer of Choice: recruit and retain a competent, professional workforce focused on serving our patients and their families Practice Fiscal Responsibility: ensure effective financial planning and the economic performance necessary to invest in strategies that improve the health of our patients Each pillar has several measurable core goals that, when cascaded throughout the entire health system and teamed with other evidence-based leadership tactics, hardwire commitment to Patients Are First. UW Medicine engaged a national expert consultant group, Studer Group, LLC, in 2010 to implement its evidence-based leadership program that improves service, satisfaction, quality, and safety while reducing costs. The current contract with Studer Group runs through fiscal year Using the Financial Statements UW Medical Center s financial statements consist of three statements: statements of net position; statements of revenues, expenses and changes in net position; and statements of cash flows. These financial statements and related notes provide information about the activities of UW Medical Center, including resources held by UW Medical Center but restricted for specific purposes by contributors, grantors, or enabling legislation. The statements of net position include all of UW Medical Center s assets and liabilities, using the accrual basis of accounting. The statement also provides an indication about which assets can be used for general purposes and which are designated for a specific purpose and includes information to help compute the rate of return on investments, evaluate the capital structure of UW Medical Center, and assess the liquidity and financial flexibility of the organization. The statements of revenues, expenses, and changes in net position reports all revenues, expenses and other activity affecting net position during the time period indicated. Net position, the difference between assets and liabilities, is one way to measure the financial health of UW Medical Center and whether the organization has been able to recover all costs through net patient service revenues and other revenue sources. The statement of cash flows report the cash provided by UW Medical Center s operating activities, as well as other cash sources such as investment income, cash payments for capital additions and improvements and 5 (Continued)

157 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) payments for debt service and interest payments. The statement provides meaningful information on where UW Medical Center s cash was generated and what it was used for. Financial Analysis Statements of Net Position The table below is a presentation of certain condensed financial information derived from UW Medical Center s statements of net position as of the fiscal years ended June 30, 2014, 2013 and (In thousands) Current assets $ 197, , ,637 Noncurrent assets: Capital assets, net 488, , ,782 Funds held by the University 241, , ,878 Assets Whose Use is Limited (AWUL) 2,164 3,493 2,676 Investment in SCCA 101,376 89,115 81,638 Other noncurrent assets 15,627 Total assets 1,046,901 1,010, ,611 Current liabilities 144, , ,004 Noncurrent liabilities 220, , ,429 Total liabilities 364, , ,433 Net position $ 682, , ,178 Total assets were $1,046.9 million at June 30, 2014 compared to $1,010.5 million at June 30, 2013, an increase of $36.4 million. Significant events within total assets during fiscal year 2014 included the positive equity interest in Seattle Cancer Care Alliance (SCCA) and an increase in prepaid expenses. Total assets increased $25.9 million during fiscal year 2013 as compared to 2012, which was primarily driven by completion of the Montlake Tower expansion project and implementation of the computerized physician order entry. Overall net position increased $14.7 million during fiscal year 2014 and increased $5.7 million during fiscal year The increase in 2014 was primarily a result of an increase in UW Medical Center s investment income in SCCA and a decrease in strategic support funding to Northwest Hospital. In 2013, the increase in net position was a result of a combination of lower inpatient volumes and favorable third-party reimbursement settlements. Current Assets Current assets consist of cash and cash equivalents, and other current assets that are expected to be converted to cash within a year. Current assets also include net patient accounts receivable valued at the estimated net realizable amount due from patients and insurers. 6 (Continued)

158 Days UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) 6% 8% 4% Total current assets were $197.8 million at fiscal year-end 2014, compared to $189.4 million at year-end 2013 and $171.6 million at year-end Fiscal year 2014 composition of current assets is illustrated in the chart to the left. 14% Other receivables Funds held by the University of Washington Supplies inventory (the University) represent cash and short-term investments held by the University on behalf of Other current assets UW Medical Center. The funds have no principal risk and are available on demand to UW Medical 68% Center. The current portion of funds held by the University generally represents the current annual debt service requirements. All other funds held by the University are shown as noncurrent assets as it is not expected that the funds will be utilized over the next year. The current portion of funds held by the University increased $0.2 million in 2014 from $10.7 million at June 30, 2013 to $10.9 million at June 30, 2014 and increased $1.2 million in 2013 from $9.5 million at June 30, 2012 to $10.7 million at June 30, Days cash on hand is utilized to evaluate an organization s continuing ability to meet its short-term operating needs. Days cash on hand (including noncurrent funds Days Cash on Hand held by the University of Washington) as of June 30 for fiscal years 2014, 2013 and 2012 is illustrated in the chart to the left Moody's "A" Rated performance in fiscal year Current Assets - Fiscal year Funds held by the University Patient accounts receivable UW Medical Center s total days cash on hand, including investments held by UW, decreased 1.7 days from days at June 30, 2013 to days at June 30, 2014 and decreased 16.2 days from days at June 30, 2012 to days at June 30, The decrease in 2014 was driven as a result of continued investment in information technology. The decrease in 2013 was primarily due to planned funding of major capital projects including computerized physician order entry and the Montlake Tower expansion. Days cash on hand at June 30, 2013 was also impacted by declining operating Net patient accounts receivable was $134.8 million as of June 30, 2014, compared to $128.8 million at June 30, The increase of $6.0 million is due to the expansion of Washington State Medicaid program, which provided an increase in Medicaid eligible patients and a decrease in self-pay patients. Net patient accounts receivable increased $9.4 million during fiscal year The change in net patient accounts receivable was driven by growth in revenue and industry trends regarding payer strategy for cost containment and contract management. 7 (Continued)

159 Days UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) Net days receivable outstanding illustrates an organization s ability to convert service revenue to cash. Net days receivable outstanding as of June 30 for fiscal years 2014, 2013 and 2012 are illustrated in the chart to the left. UW Medical Center s total net days receivable outstanding remained consistent in Total net days receivable outstanding increase 0.1 days from 53.1 days at June 30, 2013 to 53.2 days at June 30, 2014 and increased 1.4 days from 51.7 days at June 30, 2012 to 53.1 days at June 30, The increase during fiscal year 2013 was driven by growth in revenue and higher initial denial rates from payers. As of, 45% and 47% of the gross patient accounts receivable balance is due from commercial payers, 48% and 44% is due from governmental payers Medicare and Medicaid, and 6% and 9% from self-pay patients. On January 1, 2014, the Washington state Medicaid program was expanded to significantly increase the number of eligible Medicaid enrollees receiving benefits. Due to this expansion, UW Medical Center has seen an increase in Medicaid gross patient accounts receivable and a decrease in self-pay gross accounts receivable at June 30, 2014, when compared to the previous fiscal year. Other receivables consist of amounts due from external and related parties for nonpatient services. Other receivables decreased $0.1 million from $28.2 million at June 30, 2013 to $28.1 million at June 30, During fiscal year 2013, other receivables increased $6.1 million, as changes in affiliate receivables increased primarily due to timing of payments between UW Medical Center and Seattle Cancer Care Alliance (SCCA), a UW Medical Center equity method joint venture. Supplies inventory decreased $2.6 million from $18.1 million at June 30, 2013 compared to $15.5 million at June 30, Supplies inventory decreased $0.5 million during fiscal year The decreases in both years were the result of general inventory movement and timing of stock reorders. Other current assets include prepaid expenses. The increase in other current assets in fiscal year 2014 of $4.9 million relates to UW Medical Center s current portion of IT prepaid expenses and increase in prepaid rent as compared to the prior year. See further discussion regarding IT prepaid expenses in other assets. Noncurrent Assets Net Days Receivable Outstanding Moody's "A" Rated Capital assets, at cost, net of accumulated depreciation decreased $8.6 million during fiscal year 2014 from $496.9 million at June 30, 2013 to $488.3 million at June 30, 2014 and increased $16.1 million during fiscal year 2013 from $480.8 million at June 30, 2012 to $496.9 million at June 30, The decrease in fiscal year 2014 was due to continued depreciation of depreciable assets offset by moderate capital spending. The increase in 2013 was attributable to continued work on the construction of Montlake Tower and investment in information technology infrastructure and business systems. 8 (Continued)

160 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) Additional discussion regarding capital asset activity during the fiscal years can be found in the notes to the financial statements. Funds held by the University represents funds invested with the University Invested Funds program (the program) and represent cash in excess of amounts required for operations. Through the program, UW Medical Center receives a rate of return representative of fund performance. For the fiscal years 2014, 2013 and 2012, the program generated a rate of return of 2% on UW Medical Center assets. Noncurrent funds held by the University increased by $9.9 million in fiscal year 2014 as a result of cash generated from operations. Noncurrent funds held by the University decreased by $16.2 million in fiscal year 2013 which was primarily due to Montlake Tower expansion funding. Assets whose use is limited (AWUL) consists of donations restricted by donors. Donor restricted assets are invested with the University until restrictions have been met. At June 30, 2014, 2013 and 2012, assets whose use is limited was $2.2 million, $3.5 million and $2.7 million, respectively. Investment in Seattle Cancer Care Alliance (SCCA) represents UW Medical Center s interest in the joint venture. UW Medical Center accounts for its interest in the SCCA using the equity method of accounting. Investment in SCCA increased by approximately $12.3 million during fiscal year 2014 from $89.1 million at June 30, 2013 to $101.4 million at June 30, 2014 and $7.5 million during fiscal year 2013 from $81.6 million at June 30, 2012 to $89.1 million at June 30, Changes in the investment value reflect UW Medical Center s proportionate interest in the change in net assets of SCCA. The increase in 2014 and 2013 was attributable to positive results in operations partially offset by losses incurred from a proton therapy joint venture for which SCCA holds 19% preferred interest equity. Other assets consist of long-term prepaid expenses. Beginning in July 2013, UW Medicine ITS (a department of the University) began recording enterprise-wide information technology (IT) capital assets that are purchased for use by UW Medicine entities. Previously, these IT capital assets were recorded by UW Medical Center. The long-term prepaid expense reflected in other assets of $10.9 million at June 30, 2014 entitles UW Medical Center access to the enterprise wide IT software and services. Also included in other assets is $4.8 million that relates to the long-term portion of the Eastside Specialty Center prepaid rent. 1% 13% 35% 7% Current Liabilities- Fiscal year % Accounts payable Accrued salaries, wages and employee benefits Payable to contractual agencies, net Other current liabilities Current portion of longterm debt Current Liabilities Current liabilities consist of accounts payable and other accrued liabilities that are expected to be paid within a year. Total current liabilities were $144.0 million at June 30, 2014, compared to $128.7 million at June 30, 2013 and $129.0 million at June 30, Fiscal year 2014 composition of current liabilities is illustrated in the chart to the left. Accounts payable increased $7.1 million from $55.9 million at June 30, 2013 to $63.0 million at June 30, 2014 and increased $2.0 million from $53.9 million at June 30, 2012 to $55.9 million at June 30, Changes in accounts payable and 9 (Continued)

161 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) accrued liabilities are primarily driven by timing of payments to vendors and employees. Accounts payable includes amounts accrued for capital related expenditures. Included in accounts payable as of June 30, 2014, 2013 and 2012 were amounts accrued for capital related expenditures of $2.7 million, $3.1 million and $4.5 million, respectively. Accrued salaries, wages and employee benefits increased $2.0 million from $49.1 million at June 30, 2013 to $51.1 million at June 30, 2014 and $1.5 million from $47.6 million at June 30, 2012 to $49.1 million at June 30, Changes in accrued salaries, wages and employee benefits are primarily driven by the number of employees. Payable to contractual agencies, net consists of estimated reserves for cost report settlements and amounts due as intergovernmental transfers to the Washington State (the State) Health Care Authority. Payable to contractual agencies increased $6.0 million from $13.1 million at June 30, 2013 to $19.1 million at June 30, 2014 and decreased $5.3 million from $18.4 million at June 30, 2012 to $13.1 million at June 30, The increase in fiscal year 2014 was driven by development in open Medicare cost reports and Medicaid certified public expenditures (CPE) hold harmless estimates. The decrease in fiscal year 2013 was driven by changes in UW Medical Center s reserve methodology, settlement of Medicare and Medicaid CPE reports and development in open Medicare cost report and CPE hold harmless. The current portion of long-term debt was $9.8 million as of June 30, 2014 and represents upcoming debt payments on various internal lending program (ILP) debts and capital leases within the next year. The current portion of long-term debt as of June 30, 2013 and 2012 was $9.6 million and $8.2 million, respectively. Other current liabilities consist of accrued interest relating to long-term debt. Noncurrent Liabilities Noncurrent liabilities consist primarily of ILP debts and capital leases issued to finance construction and equipment. The ILP debt net of principal payments increased $6.8 million between fiscal years ended June 30, 2013 and 2014 and $20.5 million between fiscal years ended June 30, 2012 and Increases in both years were a result of financing needs related to the Montlake Tower expansion. Long-term debt to capitalization is a ratio used to evaluate capital structure of healthcare organizations. The chart to the right shows the long-term debt to capitalization ratio as of June 30 for 2014, 2013 and 2012 in comparison to the freestanding hospital median Long-term Debt to Capitalization Ratio Moody's "A" Rated UW Medical Center outperforms its peer group with respect to long-term debt to capitalization as a result of strong historical operating performance and effective maximization of its capital structure. 10 (Continued)

162 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) Additional discussion regarding long-term debt activity during the fiscal years can be found in the notes to the financial statements. Unearned revenue relates to long-term service agreements with affiliate entities. Net Position UW Medical Center reports its net position in three categories (UW Medical Center does not have assets meeting the criteria of the fourth category, donor-restricted nonexpendable net position): Net investment in capital assets Total investment in UW Medical Center property, plant, and equipment net of accumulated depreciation and outstanding debt obligations related to those capital assets. Restricted for expendable net position Restricted for expendable net position represent resources that UW Medical Center is legally or contractually obligated to spend in accordance with restrictions placed by donors and/or external parties that have placed time or purpose restrictions on the use of the asset. Unrestricted net position All other funds available to UW Medical Center that do not meet the definition of restricted or invested in capital net of related debt. As of June 30, 2014, 2013 and 2012, total net position was $682.5 million, $667.9 million and $662.2 million, respectively. 11 (Continued)

163 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) Statements of Revenues, Expenses, and Changes in Net Position UW Medical Center reported operating income of $32.5 million and an increase to net position of $14.7 million for the year ended June 30, UW Medical Center reported operating income of $34.9 million and $61.7 million and an increase in net position of $5.7 million and $36.1 million for the years ended June 30, 2013 and 2012, respectively. UW Medical Center had reported a positive change in net position in fiscal year 2014, due to an improved net nonoperating expenses. The improved financial performance in fiscal year 2014 is due to the following contributing factors: (In thousands) Total operating revenues $ 967, , ,548 Total operating expenses 935, , ,850 Operating income 32,540 34,880 61,698 Investment income, net 17,074 12,269 11,984 Interest expense (11,218) (10,642) (2,566) Other, net (24,300) (30,907) (35,090) Nonoperating expense (18,444) (29,280) (25,672) Capital contributions and transfers Increase in net position 14,653 5,706 36,075 Net position, beginning of year 667, , ,103 Net position, end of year $ 682, , ,178 Higher level of acuity care in 2014 and improved net patient service revenue as a result of cardiac, transplant and neonatal intensive care unit services. More favorable payer mix due to fewer uninsured patients becoming eligible for Medicaid benefits. Decrease in strategic support funding to Northwest Hospital and an increase in investment income related to UW Medical Center s equity interest in SCCA. 12 (Continued)

164 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) In addition, other factors were governmental incentive payments received for implementation of electronic health records and Hospital Safety Net funding received in Available beds $ Admissions 18,033 17,728 17,915 Patient days 124, , ,745 Average length of stay Occupancy 81.0% 79.8% 81% Case mix index (CMI) Surgery cases 14,538 14,271 14,696 Emergency room visits 25,338 22,977 23,487 Primary care clinic visits 55,941 58,007 73,273 Specialty care clinic visits 235, , ,214 Full time equivalents (FTEs) 4,369 4,569 4,383 Births 1,997 2,010 1,950 Solid Organ Transplants NICU Admissions Operating income declined between fiscal years June 30, 2013 and 2012 as UW Medical Center had lower than anticipated volume growth from new and expanded services provided as a result of the completed Montlake Tower expansion project and an increase in operating expenses. Operating expenses increased as a result of higher labor costs as a result of anticipated staffing needs for the Montlake Tower expansion and higher depreciation expense due to the continued investment in information technology and the tower expansion. Total Operating Revenues Total operating revenues consists primarily of net patient service revenues and other operating revenues. Net patient service revenues are recorded based on standard billing rates less contractual adjustments, charity, and a provision for uncollectible accounts. UW Medical Center has agreements with federal and state agencies, and commercial insurers that provide for payments at amounts different from gross charges. UW Medical Center provides care at no charge or reduced charges to patients who qualify under UW Medical Center s charity policy. UW Medical Center also estimates the amount of patient responsibility accounts receivable that will become uncollectible, which is reported as a reduction of net patient service revenue. The difference between gross charges and the estimated net realizable amounts from payers and patients is recorded as an adjustment to charges. The resulting net patient service revenue is shown in the statements of revenues, expenses, and changes in net position. Net patient service revenues comprise inpatient and outpatient revenue. Outpatient revenue consists of both hospital-based and clinic network revenue. Other operating revenue comprises hospital-related revenues such as parking and cafeteria sales. 13 (Continued)

165 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) UW Medical Center s payer mix is a key factor in the overall financial operating performance. The chart to the right illustrates payer mix for For the year ended, Medicaid revenue represented 17% and 15%, respectively and self-pay revenue represented 1% and 3%, respectively. This increase in Medicaid revenue is a direct result of the Medicaid program expansion in Washington State as part of the Affordable Care Act. Due to Medicaid expansion, patients who were previously self-pay now qualify for Medicaid coverage, thus in 2014 a decrease in the number of applicants for charity care and a decrease in the cost of charity care provided. 1% 1% Payer Mix - Fiscal year % Commercial 49% Medicare Medicaid 32% Self-pay Exchange (HIX) Reimbursement from governmental payers is generally below commercial rates and reimbursement rules are complex and subject to both interpretation and settlements. With the expansion of Medicaid, UW Medical Center will have higher government revenues, which are subject to settlements. For the years ended June 30, 2014, 2013 and 2012, UW Medical Center s total operating revenues were $967.7 million, $920.7 million and $877.5 million and comprised $924.4 million, $885.7 million and $842.6 million in net patient service revenues and $43.3 million, $35.1 million and $34.9 million in state appropriations and other operating revenue, respectively. The increase in operating revenues between fiscal years 2014 and 2013 was driven by higher case acuity that increased net patient service revenue and electronic health incentive payments which positively impacted other operating revenue. The increase between fiscal years 2013 and 2012 was due to patient volumes with a higher patient acuity. Total Operating Expenses Operating Expense - Fiscal year % Salaries and wages Total operating expenses were $935.1 million for the fiscal year 2014 compared to $885.8 million for the fiscal year 2013 and $815.9 million for the fiscal year The composition of fiscal year 2014 operating expenses is illustrated in the chart to the left. 23% 26% 11% 34% Employee benefits Purchased services Supplies and other Depreciation and amortization Effective July 2013, UW Medicine adopted a purchased service model for their shared services function related to information technology services (IT). With this adoption, UW Medical Center s allocation of IT operating costs are recorded as purchased services in Previously, IT operating costs allocated to UW Medical Center were recorded as salaries and wages, benefits and purchased services expense. 14 (Continued)

166 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) Salaries and wages decreased $7.9 million from $328.4 million in fiscal year 2013 to $320.5 million in fiscal year The decrease in salaries and wages in fiscal year 2014 is primarily attributed to the adoption of the purchased service model for IT Services as described above, offset by employee merit increases. Salaries and wages increased $13.3 million from $315.1 million in fiscal year 2012 to $328.4 million in fiscal year The increase in salaries and wages expense was driven by increased full-time equivalent (FTE) employees as a result of expanded staffing needs for space opened under Phase I of the Montlake Tower expansion project at the beginning of the fiscal year. Employee benefits decreased $9.6 million from $109.6 million in fiscal year 2013 to $100.0 million in fiscal year 2014 and increased $15.2 million from $94.4 million in fiscal year 2012 to $109.6 million in fiscal year Employee benefit costs are function of employment and the decrease in benefits expense between fiscal years 2014 and 2013 was consistent with the decrease in salaries and wages expense. The increase in benefits expense between 2013 and 2012 correlates to the increase in salaries and wages expense. In 2014, the University lowered their benefit load rate which positively impacted UW Medical Center. Purchased services expense, which consists of professional and consulting fees, increased $47.6 million from $193.3 million in fiscal year 2013 to $240.9 million in fiscal year 2014 and increased $23.0 million from $170.3 million in fiscal year 2012 to $193.3 million in fiscal year As described above, UW Medical Center s allocation of IT operating expenses are recorded in purchased services during fiscal year 2014 as a result of adopting a purchased service model for IT expenditures. Additionally, the increase in purchased services is driven by the implementation of the specialty clinics computerized physician order entry system that occurred in late fiscal year 2014 and other major IT projects. Supplies and other expense includes medical and surgical supplies, pharmaceutical supplies, insurance, taxes, and other expenses. In total, these expenses increased $18.6 million from $202.7 million in fiscal year 2013 to $221.3 million in fiscal year The increase was driven by medical supplies expense as a result of acute tertiary care. Supplies and other expense increased $7.8 million from $194.9 million in fiscal year 2012 to $202.7 million in fiscal year The increase was driven by increases in medical supplies expense as result of price inflation. Depreciation expense increased $0.6 million from $51.8 million in fiscal year 2013 to $52.4 million in fiscal year 2014 and increased $10.7 million from $41.1 million in fiscal year 2012 to $51.8 million in fiscal year The increase during fiscal year 2013 was due to the capitalization of Phase I of the Montlake Tower expansion project. Nonoperating Revenues (Expenses) Nonoperating revenues (expenses) consist primarily of investment income, interest expense, intergovernmental transfer expense and strategic support to affiliates. Net nonoperating expenses decreased $10.8 million and increased $3.6 million between fiscal years 2014, 2013 and 2012, respectively. The decrease in net nonoperating expense of $10.8 million in 2014 is attributable to an increase in UW Medical Center s investment income in SCCA and a decrease in strategic support to Northwest Hospital. The increase in fiscal year 2013 was driven by increased interest expense as a result of capital project funding through ILP debt. 15 (Continued)

167 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) Total Margin Total margin or excess margin is a ratio that defines the percentage of total revenue that has been realized in the form of net income and is a common measure of total hospital profitability. Total margin for the fiscal years 2014, 2013 and 2012 compared to industry median is illustrated in the chart to the right. Regulatory, Legislative and Accounting Changes The following regulatory, legislative and accounting activity will impact all entities in UW Medicine during fiscal year 2014 and beyond: 8% 6% 4% 2% 0% -2% 5.7% 2013 Moody's "A" Rated Total Margin 1.5% 0.6% 4.1% International Classification of Diseases (ICD) v10 Code of Federal Regulations (45 CFR Part 162) requires healthcare providers to implement ICD-10 no later than October 1, The implementation date has been delayed from October 1, ICD-10 represents a significant change in the standard healthcare coding system and will impact every system, process and transaction that contains or uses a diagnosis code or inpatient procedure code. UW Medicine has been undertaking activities related to the implementation of ICD-10 since the beginning of fiscal year Medicare Sequestration On April 1, 2013, a provision of the Budget Control Act of 2011 requiring mandatory across-the-board reductions in Federal spending commenced (commonly referred to as sequestration). The provision included a 2% reduction to Medicare payments made to healthcare providers, including payments made under the meaningful use incentive program. The payment reduction is effective until WA Medicaid IP & OP Payment System Rebasing The Washington Healthcare Authority (HCA) uses the Outpatient Prospective Payment System (OPPS) and All Patient Diagnosis Related Group (AP-DRG) methodologies for reimbursing outpatient and inpatient Medicaid claims, respectively. In 2013, HCA began a project to implement new payment systems for outpatient and inpatient claims which was implemented on July 1, Under the project, outpatient reimbursement will transition to Enhanced Ambulatory Payment Groups (EAPG) methodology and inpatient reimbursement will transition to All Patient Refined Diagnosis Related Group (APR-DRG) methodology. The EAPG method is a visit-based patient classification system that directs payment to the main significant procedure or treatment provided during a visit, instead of a la carte volume-based purchasing and uses packaging and bundling of payment for related services to create incentives to provide services in the most efficient way. The APR-DRG will ensure the state is compliant with ICD-10 requirements, is more granular than AP-DRG and will increase the number of acuity-driven groupings for payment purposes. 16 (Continued)

168 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Management s Discussion and Analysis (Unaudited) Medicaid Expansion On January 1, 2014, the Washington State Medicaid program was expanded to significantly increase the number of Medicaid enrollees receiving benefits. Due to the increased access to Medicaid coverage, UW Medical Center is experiencing a reduction in uninsured and underinsured patients and an increase in patients that qualify for Medicaid. The reduction of uninsured and underinsured patients is expected to have an impact on Medicare and Medicaid Disproportionate Share (DSH) reimbursement methodologies in the future. UW Medical Center has experienced a change to their payer mix, which UW Medical Center anticipates to continue in Pay for Performance The Affordable Care Act mandated programs that affect reimbursement through evaluation of the quality of care and cost of care provided to patients at the federal level, however, there are an increasing number of programs arising from state and private interests. These programs provide incentives (and/or penalties) for reporting performance data and those that provide incentives (and/or penalties) based on benchmarking performance data against other providers regionally and nationally. The pay for performance programs will continue into the future and UW Medicine is examining performance to attain incentive dollars. Employee Pension Costs In June 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions, effective for the University s fiscal year beginning July 1, This statement requires governments providing defined benefit pensions to their employees to recognize the net pension liability for pension benefits on their statements of net position. Net pension liability is measured as total pension liability, less the amount of the plan s fiduciary net position. Since the University participates in the Washington State Public Employee Retirement Plans, this statement will require the University to record their proportionate share of the net pension liability at June 30, Currently, the University and UW Medical Center do not record an obligation of net pension liability. UW Medical Center will record their proportionate share of net pension liability in its 2015 financial statements, which is expected to have a significant impact in its financial statements. Montlake Tower Expansion Project In February 2008, the University of Washington Board of Regents granted approval to proceed with phase one of a multiphase inpatient expansion known as the Montlake Tower. The scope of phase one included the vertical shell for the entire eight-floor expansion, as well as, a new neonatal intensive care unit, an adult oncology and blood and bone marrow transplant unit, additional diagnostic imaging capacity, and future operating room capacity. In July 2012, phase one was substantially completed and operational components of phase one began servicing patients in October Total cost of phase one was $210.4 million, which was primarily funded through borrowings from the University of Washington Internal Lending Program. In November 2012, the University of Washington Board of Regents granted approval to proceed with phase two of the Montlake Tower project. The scope of phase two will complete three shelled inpatient floors including the addition of intensive care and medical/surgical beds as well as additional operating rooms. Estimated cost of phase two is currently projected at $186.3 million. As part of the approval, the Board of Regents authorized funding from the University of Washington Internal Lending Program up to $136.1 million, with the remaining $50.2 million of anticipated cost to be funded through hospital operations. Construction on phase two began in 2014 and is expected to be completed by June

169 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Statements of Net Position (In thousands) Assets Current assets: Funds held by the University of Washington $ 10,979 10,732 Patient accounts receivable, less allowance for uncollectible accounts of $11,617 in 2014 and $21,679 in , ,832 Other receivables 28,158 28,163 Supplies inventory 15,513 18,145 Other current assets 8,382 3,480 Total current assets 197, ,352 Noncurrent assets: Capital assets, at cost, net of accumulated depreciation 488, ,908 Funds held by the University of Washington 241, ,664 Assets whose use is limited 2,164 3,493 Investment in Seattle Cancer Care Alliance 101,376 89,115 Other assets 15,627 Total noncurrent assets 849, ,180 Total assets $ 1,046,901 1,010,532 Liabilities and Net Position Current liabilities: Accounts payable $ 63,039 55,945 Accrued salaries, wages and employee benefits 51,095 49,082 Payable to contractual agencies, net 19,092 13,118 Current portion of long-term debt 9,796 9,580 Other current liabilities 1, Total current liabilities 144, ,707 Noncurrent liabilities: Long-term debt, net of current portion 215, ,843 Unearned revenue 4,653 2,098 Total liabilities 364, ,648 Net position: Net investment in capital assets 262, ,485 Expendable, restricted 2,164 3,495 Unrestricted 417, ,904 Total net position 682, ,884 Total liabilities and net position $ 1,046,901 1,010,532 See accompanying notes to financial statements. 18 (Continued)

170 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Statements of Revenues, Expenses and Changes in Net Position Years ended (In thousands) Operating revenues: Net patient service revenues (net of provision for uncollectible accounts of $6,150 in 2014, and $13,287 in 2013) $ 924, ,655 State appropriation 6,477 6,419 Other revenue 36,819 28,631 Total operating revenues 967, ,705 Operating expenses: Salaries and wages 320, ,393 Employee benefits 100, ,588 Purchased services 240, ,333 Supplies and other 221, ,709 Depreciation 52,373 51,802 Total operating expenses 935, ,825 Income from operations 32,540 34,880 Nonoperating revenues (expenses): Investment income 17,074 12,269 Interest expense (11,218) (10,642) Funding to affiliates (23,643) (31,918) Other, net (657) 1,011 Nonoperating expenses (18,444) (29,280) Income before capital contributions and transfers 14,096 5,600 Gifts, grants and other capital contributions and transfers Total increase in net position 14,653 5,706 Net position beginning of year 667, ,178 Net position end of year $ 682, ,884 See accompanying notes to financial statements. 19

171 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Statements of Cash Flows Years ended (In thousands) Cash flows from operating activities: Cash received for patient care $ 924, ,003 Cash received for other services 45,601 29,982 Cash paid to employees (418,490) (436,545) Cash paid to suppliers, and others (471,717) (392,118) Net cash provided by operating activities 79,748 72,322 Cash flows from noncapital financing activities: Funding to affiliates (23,643) (31,918) Other, net (869) Net cash used in noncapital financing activities (24,512) (31,918) Cash flows from capital and related financing activities: Proceeds from borrowings 13,492 28,363 Purchases of capital assets (43,762) (69,640) Principal payments on long-term debt (9,579) (8,527) Interest payments on long-term debt, net of amounts capitalized (11,051) (10,642) Net cash used in capital and related financing activities (50,900) (60,446) Cash flows from investing activities: Change in funds held by the University and assets whose use is limited (9,128) 16,214 Investment Income 4,904 4,811 Distributions from joint ventures Net cash (used in) provided by investing activities (4,089) 21,250 Increase in cash and cash equivalents 247 1,208 Cash and cash equivalents, beginning of year 10,732 9,524 Cash and cash equivalents, end of year $ 10,979 10,732 Reconciliation of income from operations to net cash provided by operating activities: Income from operations $ 32,540 34,880 Adjustments to reconcile income from operations to net cash provided by operating activities: Depreciation 52,373 51,802 Provision for uncollectible accounts 6,150 13,287 Loss on disposal of capital assets Net increase in current assets (30,031) (29,844) Net decrease in current liabilities, except current portion of long-term debt 15,504 (356) Increase in unearned revenue 2,555 2,098 Net cash provided by operating activities $ 79,748 72,322 Supplemental disclosure of noncash investing, capital, and financing activities: Change in capital assets included in accounts payable $ (426) (1,363) Capital contributions See accompanying notes to financial statements. 20

172 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (1) Organization University of Washington Medical Center (UW Medical Center) is a 450 licensed-bed hospital and is a division of the University of Washington (a not-for-profit, tax-exempt agency of the State of Washington) (the University). Authority for specified governance functions of UW Medical Center has been delegated by the Board of Regents (the Regents) to the UW Medicine Board (the Board) as specified in the Board s bylaws, originally adopted by the Regents in 1976 and amended in February The Board s members during fiscal year 2014 were: Michael D. Garvey, Chairman James K. Anderson Alan Frazier Gerald Grinstein Kimberly McNally Dennis I. Okamoto Carolyn V. Parnell William J. Rex Robert Stacey Jo Ann Taricani Rich Jones, Vice Chairman Kristianne Blake Allan C. Golston Gary Kohlwes Julie A. Nordstrom Arthur F. Skip Oppenheimer Paul G. Ramsey, M.D. Herman Sarkowsky Michael K. Young Peter van Oppen UW Medical Center is under the direction of the Executive Director, who is accountable to the Board and UW Medicine s Clinical Operations Officer and Vice-President for Medical Affairs for the management of UW Medical Center. UW Medical Center is part of UW Medicine which includes: Harborview Medical Center (Harborview), Northwest Hospital & Medical Center (Northwest Hospital), Valley Medical Center (VMC), UW Physicians Network dba UW Neighborhood Clinics (UWNC), UW Physicians (UWP), the UW School of Medicine (the School), and Airlift Northwest (Airlift). In addition, UW Medical Center is an equity shareholder in Seattle Cancer Care Alliance (SCCA), a joint venture partnership with Fred Hutchinson Cancer Research Center (FHCRC) and Seattle Children s Hospital (SCH). (2) Summary of Significant Accounting Principles (a) Accounting Standards The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America using the accrual basis of accounting. UW Medical Center s financial statements and note disclosures are based on all applicable Government Accounting Standards Board (GASB) pronouncements and interpretations. UW Medical Center uses proprietary fund accounting. (b) Basis of Accounting UW Medical Center s financial statements have been prepared using the accrual basis of accounting with the economic resources measurement focus. Under this method of accounting, revenues are recognized when earned and expenses are recorded when liabilities are incurred without regard to receipt or disbursement of cash. 21 (Continued)

173 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (c) (d) Use of Estimates The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in UW Medical Center s financial statements include patient accounts receivable allowances and third-party payer settlements. Funds Held by the University of Washington UW Medical Center operating and capital funds are invested directly with the University. All balances are available on demand and are stated at fair value. In exchange, the University offers a stipulated rate of return determined at the end of the reporting period by the University based on pooled investment performance and the University s reserve fund goals. For fiscal years 2014 and 2013, the rate used was 2%. Amounts classified as current assets are considered cash and cash equivalents for presentation in the statements of cash flows and represent the current portion of the debt service requirements. (e) (f) Inventories Inventories consist primarily of surgical, medical, and pharmaceutical supplies in organized stores at various locations across UW Medical Center. Inventories are recorded at the lower of cost (first-in, first-out (FIFO)) or market. Capital Assets Capital assets, defined as purchases with a per item cost of $2,000 or greater and a useful life of at least two years, are stated at cost at acquisition or if acquired by gift, at fair value at the date of the gift. Additions, replacements, major repairs, and renovations are capitalized. Maintenance and repairs are expensed. The cost of the capital assets sold or retired and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recorded in supplies and other expense in the statements of revenues, expenses, and changes in net position. The provision for depreciation is determined by the straight-line method, which allocates the cost of tangible property ratably over its estimated useful life. The estimated useful lives used by UW Medical Center are as follows: Land improvements Buildings, renovations and furnishings Fixed equipment Movable equipment 10 to 25 years 10 to 40 years 15 to 20 years 3 to 20 years 22 (Continued)

174 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements Equipment under capital lease is amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the statements of revenues, expenses, and changes in net position. Interest is capitalized on construction projects as a cost of the related project beginning with commencement of construction and ceases when the construction period ends and the related asset is placed in service. Interest capitalized during 2014 and 2013 was $0.8 million and $0.3 million, respectively. (g) (h) Other Assets Beginning in July 2013, UW Medicine ITS (a department of the University) began recording enterprise-wide information technology (IT) capital assets that are purchased for use by UW Medicine entities. Previously, these capital assets were recorded at UW Medical Center and Harborview. UW Medical Center provides advance funding to UW Medicine ITS which entitles UW Medical Center access to the enterprise-wide IT software and services. This prepaid portion of this funding is reported within other current assets and other assets on the statements of net position. At June 30, 2014, $5.5 million is recorded in other current assets and $10.9 million is recorded in other assets. Compensated Absences UW Medical Center employees earn annual leave at rates based on length of service and sick leave at the rate of one day per month. Annual leave balances, can be converted to monetary compensation upon employment termination. Sick leave balances, which are unlimited, can be converted to monetary compensation annually at 25% of the employees normal compensation rate for any balance that exceeds 480 hours or for any balance upon retirement or death. UW Medical Center recognizes annual and sick leave liabilities when earned. Annual leave accrued at is $22.4 million and $21.5 million, respectively. Sick leave accrued as of is $8.0 million and $7.5 million, respectively. Compensated absences are reported within the accrued salaries, wages and employee benefits on the statements of net position. (i) Payable to Contractual Agencies, Net UW Medical Center is reimbursed for Medicare inpatient, outpatient, psychiatric, and rehabilitation services, and for capital and medical education costs during the year either prospectively or at an interim rate. The difference between interim payments and the reimbursement computed based on the Medicare filed cost report results in an estimated receivable from or payable to Medicare at the end of each year. The Medicare program s administrative procedures preclude final determination of amounts receivable from or payable to UW Medical Center until after the cost reports have been audited or otherwise reviewed and settled by Medicare. Public hospitals located in the State of Washington designated by the Washington State legislature are reimbursed at the full cost of Medicaid inpatient covered services under the public hospital CPE payment method. See note 4(a) for discussion regarding this program. 23 (Continued)

175 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements The estimated settlement amounts for Medicare cost report and CPE payments that are not considered final are included in payable to contractual agencies, net in the accompanying statements of net position. (j) Classification of Revenues and Expenses UW Medical Center s statements of revenues, expenses, and changes in net position distinguish between operating and nonoperating revenues and expenses. Operating revenues, such as patient service revenue, result from exchange transactions associated with providing healthcare services UW Medical Center s primary business. Exchange transactions are those in which each party to the transaction receives and gives up essentially equal values. Operating expenses are all expenses, other than financing costs, incurred by UW Medical Center to provide healthcare services to UW Medical Center patients. Nonoperating revenues and expenses are recorded for certain exchange and nonexchange transactions. This activity includes investment returns, interest expense, intergovernmental transfer expense, strategic support to UW Medicine entities, and investment income generated through Seattle Cancer Care Alliance (SCCA). (k) Net Patient Service Revenues UW Medical Center has agreements with third-party payers that provide for payments to UW Medical Center at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenues are reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. A summary of the payment arrangements with major third-party payers is as follows: Medicare Acute inpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge based on Medicare severity diagnosis-related groupings (MS-DRGs), as well as reimbursements related to capital costs. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Payments for Medicare outpatient services are provided based upon a prospective payment system known as ambulatory payment classifications (APC s). APC payments are prospectively established and may be greater than or less than the primary government s actual charges for its services. The Medicare program utilizes the prospective payment system known as case mix group (CMGs) for rehabilitation services reimbursement. As with MS-DRGs, CMG payments are prospectively established and may be greater than or less than UW Medical Center s actual charges for its services. Geropsychiatric services are also paid prospectively using a federal per diem payment rate adjusted for comorbidity and various adjustment factors. Third-party settlements are accrued on an estimated basis in the 24 (Continued)

176 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements period the related services are rendered and adjusted in future periods as final settlements are determined. Medicaid Inpatient services rendered to Medicaid program beneficiaries are paid at approximate cost or hold harmless estimates and settled at prospectively determined rates per discharge. Outpatient services rendered are provided based upon the APC prospective payment system. Commercial UW Medical Center also has entered into payment agreements with certain commercial insurance carriers and preferred provider organizations. The basis for payment to UW Medical Center under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. Exchange (HIX) Washington State health exchange (HIX) entered into agreements with certain commercial insurance plans to provide patients access to health care services. The basis for payment to UW Medical Center under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. (l) Charity Care UW Medical Center provides care without charge or at amounts less than established rates to patients who meet certain criteria under its charity care policy. Records are maintained to identify and monitor the level of charity care provided. These records include charges foregone for services and supplies furnished under its charity care policy to the uninsured and the underinsured. Because UW Medical Center does not pursue collection of amounts determined to qualify as charity care, these are not reported as net patient service revenue. The charges associated with charity care and uncompensated care provided by UW Medical Center were approximately $38.7 million and $48.9 million for the years ended, respectively. UW Medical Center estimates the cost of charity care using its cost to charge ratio of 46.3% and 47.4% for the fiscal years ended, respectively. Applying UW Medical Center s cost to charge ratio of 46.3% to total charity and uncompensated care of $38.7 million results in an estimated cost of charity care of $17.9 million for the fiscal year ended June 30, Applying UW Medical Center s cost to charge ratio of 47.4% to total charity of $48.9 million results in an estimated cost of charity care of $23.2 million for the fiscal year ended June 30, (m) Intra-UW Governmental Transfers When fund transfers occur between UW Medical Center and other UW divisions and economic benefits are neither provided nor received in exchange for the transfer, the transfers are classified as Intra-UW governmental transfers and are reported in nonoperating (expenses)/revenues on the statements of revenues, expenses, and changes in net position. 25 (Continued)

177 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (n) (o) (p) Federal Income Taxes UW Medical Center, as a division of UW, is not subject to federal income under Section 115 of the Internal Revenue Code, unless unrelated business income tax is generated during the year. Reclassification Certain 2013 account balances have been reclassified to conform to the 2014 presentation format. New Accounting Pronouncements On July 1, 2013, UW Medical Center adopted GASB Statement No. 65 (GASB 65), Items Previously Reported as Assets and Liabilities. This statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as expenses or revenues, certain items that were previously reported as assets and liabilities. Deferred financing costs previously recorded as an asset are required to be expensed as incurred. With the adoption of GASB 65, net position was restated at July 1, 2012, which resulted in a retrospective write-off of deferred financing costs that were previously recorded as an asset. The impact to the July 1, 2012 net position is reflected below (in thousands): Net position at July 1, 2012, as previously reported $ 663,470 Adoption of GASB 65 1,292 Net position at July 1, 2012, as restated $ 662,178 UW Medical Center does not have any assets and liabilities that met the definition of a deferred outflow or inflow of resources. On July 1, 2013, UW Medical Center adopted GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. This statement requires a government that extends a nonexchange financial guarantee to recognize a liability when qualitative factors and historical data, if any, indicate that it is more likely than not that the government will be required to make a payment on the guarantee. This statement specifies the information required to be disclosed by governments that extend nonexchange financial guarantees. In addition, this statement requires new information to be disclosed by governments that receive nonexchange financial guarantees. UW Medical Center has not extended or received any nonexchange financial guarantees for the year ended June 30, 2014, therefore there is no impact to the UW Medical Center financial statements. In June 2012, GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions, which is effective for the fiscal year beginning July 1, It requires governments providing defined benefit pensions to their employees to recognize the net pension liability for pension benefits on their statements of net position. Net position liability is measured as total pension liability, less the amount of the plan s fiduciary net position. Since the University participates in the Washington State Public Employee Retirement Plans, this statement will require the University to record their 26 (Continued)

178 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements proportionate share of the net pension liability at June 30, Currently, the University and UW Medical Center do not record an obligation of net pension liability. UW Medical Center will record their proportionate share of net pension liability in its 2015 financial statements, which will have a material impact to its financial statements. In January 2013, GASB issued Statement No. 69, Government Combinations and Disposals of Government Operations. This statement requires disclosures to be made about government combinations and disposals of government operations in order to enable financial statement users to evaluate the nature and financial effects of those transactions. The requirements of this Statement are effective for financial reporting periods beginning in fiscal year 2015, and will be applied on a prospective basis when applicable. UW Medical Center is currently analyzing the impact of this statement. In November 2013, GASB issued Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, an amendment of GASB Statement No. 68. The purpose of this statement is to address an issue regarding application of the transition provisions of GASB Statement No. 68, Accounting and Financial Reporting for Pensions. The statement relates to amounts associated with contributions, if any, made by a state or local government employer, or nonemployer contributing entity, to a defined benefit pension plan after the measurement date of the government s beginning net pension liability. The University and UW Medical Center are currently analyzing the impact of this statement. (3) Correction of an Immaterial Error During the year ended June 30, 2014, UW Medical Center identified an error in the statement of cash flows related to the classification of subsidies to affiliated entities. As a result, the fiscal year 2013 financial statements have been corrected to decrease cash flows for non-capital financing activities and increase cash flows for investing activities by $31.9 million. (4) Net Patient Service Revenues Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. In 2014 and 2013, net patient service revenue includes approximately $2.9 million and $14.6 million, respectively, relating to prior years net Medicare and Medicaid cost report settlements and revised estimates, including disproportionate share reimbursement and the CPE program. 27 (Continued)

179 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements The following are the components of net patient service revenues for the year ended June 30 (in thousands): Patient service revenues $ 1,942,510 1,765,565 Less adjustments to patient service revenues: Charity care 36,959 48,925 Contractual discounts 975, ,698 Provision for uncollectible accounts 6,150 13,287 Total adjustments to patient service revenues 1,018, ,910 Net patient service revenues $ 924, ,655 UW Medical Center grants credit without collateral to its patients, most of whom are insured under third-party payer agreements. The mix of gross patient charges and gross receivables from significant third-party payers at was as follows: Patient service charges Accounts receivable 2014: Medicare 32% 30% Medicaid Commercial and other Exchange (HIX) 1 1 Self pay 1 6 Total 100% 100% 2013: Medicare 32% 28% Medicaid Commercial and other Self pay 3 9 Total 100% 100% (a) Medicaid Certified Public Expenditure Reimbursement Public hospitals located in the State of Washington designated by the Washington State legislature are reimbursed at the full cost of Medicaid inpatient covered services under the public hospital CPE payment method. Full cost payments are determined using the respective hospital s Medicaid ratio of cost to charges to determine the cost for covered medically necessary services. The costs will be certified as actual 28 (Continued)

180 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements expenditures by the hospital and the State claims federal match on the amount of the related certified public expenditures. According to the Centers for Medicare and Medicaid Services (CMS) approved Medicaid State Plan, participating hospitals receive only the federal match portion of the allowable costs. UW Medical Center received $32.7 million and $29.6 million in claims payments under this program for the years ended, respectively. In addition, UW Medical Center receives the federal match portion of Disproportionate Share (DSH) payments, which are the lesser of qualifying uncompensated care cost or the hospital s specific limit. UW Medical Center received $19.6 million and $19.6 million in DSH funding under this program for the years ended, respectively. Since the inception of the program, the Washington State Legislature (the State) has provided through an annual budget proviso, a hold harmless provision for hospitals participating in the CPE program. Through this proviso, hospitals participating in the CPE program, will receive no less in combined state and federal payments than they would have received under the previous payment methodology. In addition, the hold harmless provision ensures that participating hospitals receive DSH payments as specified in the legislation. In the event of a shortfall between CPE program payments and the amount determined under the hold harmless provision, the difference is paid to the hospitals as a grant from state only funds. UW Medical Center received $2.5 million and $2.3 million in state grants for the years ended June 30, 2014 and 2013, respectively. Claims payments, DSH payments, and state grant funds are included in net patient service revenues in the statements of revenues, expenses, and changes in net position. CPE payments are subject to retrospective determination of actual costs once UW Medical Center s Medicare Cost Report is audited. CPE program payments are not considered final until retrospective cost reconciliation is complete, after UW Medical Center receives its Medicare Notice of Program Reimbursements (NPR) for the corresponding cost reporting year. To date, only the 2006 CPE program year has had a final settlement. Interim state grant payments are retrospectively reconciled to hold harmless after actual claims are repriced using the applicable DRG payment methodology. This process takes place approximately 12 months after the end of the fiscal year and results in either a payable to, or receivable from, the state Medicaid Program. UW Medical Center has estimated the expected final settlement amounts based on the difference between CPE payments received and the estimated hold harmless amount. As of, for fiscal years 2007 through 2014, UW Medical Center had an estimated payable for the CPE program of $11.2 million and $5.4 million, respectively, which is included as a liability in payable to contractual agencies in the accompanying statements of net position. (b) Professional Services Supplemental Payment (PSSP) Program The professional services supplemental payment (PSSP) program is a program managed by the Washington State Health Care Authority (WSHCA) benefiting certain public hospitals. Under the program, UW Medical Center, Harborview, VMC, UWP, and Children s University Medical Group 29 (Continued)

181 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (CUMG) receive supplemental Medicaid payments for the physician and other professional services for which they bill. These supplemental payments equal the difference between the standard Medicaid reimbursement and the upper payment limit allowable by federal law. UW Medical Center and Harborview provide the nonfederal share of the supplemental payments that are used to obtain the matching federal funds. UW Medical Center recorded $3.4 million and $5.1 million for the years ended June 30, 2014 and 2013, respectively, in intergovernmental transfers (IGTs) to WSHCA related to professional claims paid in those fiscal years, which is included in nonoperating expenses in the statements of revenues, expenses, and changes in net position. WSHCA used the federal match funds to make professional services supplemental payments to UW Medicine entities. UW Medical Center recognized $0.1 million and $0.4 million in PSSP supplemental payments for the years ended, respectively. These payments are included in net patient service revenues in the statements of revenues, expenses, and changes in net position. There is no requirement that UWP and CUMG PSSP payments be returned to Harborview and UW Medical Center as a condition for making the IGT s. PSSP funds are combined with other revenues used by the UW School of Medicine for the central support of faculty costs. Thus, the School requires less funding from UW Medical Center. The faculty support is reduced by $6.6 million and $7.8 million in fiscal years 2014 and 2013, respectively. This reduction is included as an offset to purchased services in the statements of revenue, expenses, and changes in net position. In July 2013, WSHCA submitted a state plan amendment (SPA) to the CMS to create a Provide Access Payment (PAP) program. PAP will create supplemental professional payments similar to PSSP for services provided to Medicaid managed care enrollees. WSHCA could not make PAP payments until CMS approved the SPA. CMS approved the SPA in August 2014 for services on and after July 1, (c) Hospital Safety Net Program The Hospital Safety Net Assessment Act (HSNA) uses local funds obtained through an assessment levied on Prospective Payment System (PPS) hospitals and federal matching funds to increase Medicaid payments to hospitals. Under this program, PPS program hospitals are assessed a fee on all non-medicare patient days. Under the original HSNA program, HSNA funds were used to prevent the significant budget cuts proposed during the 2009 session of the state legislature. The original legislation expired on June 30, In its 2013 session, the Washington State legislature passed a new assessment program that was similar to the original program as the State will use federal matching funds to increase Medicaid hospital payments. Under the new HSNA program, PPS hospitals receive supplemental Medicaid payments, Critical Access Hospitals receive disproportionate share payments and CPE hospitals receive state grants. The safety net assessment was subject to approval by the Center for Medicare and Medicaid Services before it took effect. CMS approved this program in The program has an expiration date of June 30, (Continued)

182 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements UW Medical Center is exempt from the assessment as the hospital is operated by an agency of the state government and also participates in the CPE program. UW Medical Center recognized grant funding of $3.3 million for the year ended June 30, 2014, and is recorded in other operating revenue in the statements of revenues, expenses, and changes in net position. Under the original program, UW Medical Center recognized increased reimbursement of $8.0 million under this program for the year ended June 30, 2013, which is included in net patient service revenues in the statements of revenues, expenses, and changes in net position. Under a separate agreement, UW Medical Center agreed to reimburse Northwest Hospital for any shortfall arising as a result of the original safety net program. One primary purpose of the agreement was to hold Northwest Hospital harmless for the transition from being a stand-alone hospital to a hospital that is part of a multihospital system. As a result, UW Medical Center recorded approximately $2.1 million in 2013, of additional reimbursement to Northwest Hospital, which is included as a reduction in net patient service revenue. (d) Meaningful Use Incentives The American Recovery and Reinvestment Act of 2009 (ARRA) established incentive payments to eligible professionals and hospitals participating in Medicare and Medicaid programs that adopt certified electronic health records (EHRs) but only if the technology is being used in a meaningful way that supports the ultimate goals of improving quality, safety, and efficiency of care. Meaningful use is defined with specific quality performance metrics for eligible healthcare professionals and hospitals and certain thresholds must be met and maintained to receive payment. UW Medical Center recognized meaningful use incentives of $5.7 million and $3.6 million for the years ended, respectively, which are included in other operating revenues in the statements of revenues, expenses, and changes in net position. UW Medical Center has a related receivable of $0.3 million and $1.1 million as of, respectively, recorded within the other receivables on the statements of net position. These amounts may be subject to future audits. (5) State Appropriation An appropriation is made by the State to the University on a biennial basis. UW Medical Center is designated as a division of the major program hospitals included within the total appropriation. This appropriation is specifically designated by the State for the training of future healthcare professionals and to upgrade the skills of current practitioners. Due to the nature of the designation, these amounts are included in operating revenues in the accompanying statements of revenues, expenses, and changes in net position. UW Medical Center recognized $6.5 million and $6.4 million for the fiscal years ended June 30, 2014 and 2013, respectively. 31 (Continued)

183 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (6) Capital Assets The activity in UW Medical Center s capital asset and related accumulated depreciation accounts for the years ended are set forth below (in thousands): Balance Balance June 30, June 30, 2013 Additions Transfers Retirements 2014 Capital assets, not being depreciated: Land $ 2,631 2,631 Art 1, ,389 Construction in process 53,942 44,068 (44,080) 53,930 Total capital assets, not being depreciated 57,937 44,093 (44,080) 57,950 Capital assets, being depreciated: Land improvements 9,989 9,989 Buildings, renovations and furnishings 559,108 6,427 (920) 564,615 Fixed equipment 101,587 1,550 (56) 103,081 Movable equipment 363, ,103 (33,619) 366,781 Total capital assets, being depreciated 1,034, ,080 (34,595) 1,044,466 Total capital assets at historical cost 1,092,575 44,436 (34,595) 1,102,416 Less accumulated depreciation for: Land improvements (3,006) (330) (3,336) Buildings, renovations and furnishings (212,566) (19,540) 920 (231,186) Fixed equipment (86,480) (2,123) 56 (88,547) Movable equipment (293,615) (30,380) 32,962 (291,033) Total accumulated depreciation (595,667) (52,373) 33,938 (614,102) Total capital assets, net $ 496,908 (7,937) (657) 488, (Continued)

184 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements Balance Balance June 30, June 30, 2012 Additions Transfers Retirements 2013 Capital assets, not being depreciated: Land $ 2,631 2,631 Art 1, ,364 Construction in process 236,030 68,277 (250,365) 53,942 Total capital assets, not being depreciated 239,997 68,305 (250,365) 57,937 Capital assets, being depreciated: Land improvements 9, ,989 Buildings, renovations and furnishings 356, ,052 (546) 559,108 Fixed equipment 93,671 7, ,587 Movable equipment 332, ,669 (7,865) 363,954 Total capital assets, being depreciated 792, ,664 (8,411) 1,034,638 Total capital assets at historical cost 1,032,304 68, (8,411) 1,092,575 Less accumulated depreciation for: Land improvements (2,663) (330) (13) (3,006) Buildings, renovations and furnishings (193,038) (19,651) (268) 391 (212,566) Fixed equipment (84,483) (1,963) (34) (86,480) Movable equipment (271,338) (29,858) 16 7,565 (293,615) Total accumulated depreciation (551,522) (51,802) (299) 7,956 (595,667) Total capital assets, net $ 480,782 16,581 (455) 496,908 Capital assets, net include intangible assets, net of accumulated depreciation of $19.0 million and $25.0 million as of, respectively. 33 (Continued)

185 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (7) Long-Term Debt and Capital Leases Long-term debt, reported as a part of noncurrent liabilities, consists of the following as of June 30 (in thousands): Internal Lending Program Debt: Expansion Project, 5.5% interest rate $ 166, ,920 All other debts, 3.5% to 5.0% interest rates 57,766 61,271 Capital leases for medical office building and equipment 1,502 4,232 Total long-term debt 225, ,423 Less current portion (9,796) (9,580) Total long-term debt, net of current portion $ 215, ,843 (a) Long-term Debt Overview Under the Debt Management Policy: Statement of Objectives and Policies UW Medical Center obtains capital financing through the University s Internal Lending Program (ILP). The ILP is an internal financing pool intended to lower the University s overall cost of capital and provide a predictable borrowing rate for borrowers within the University. These loans are funded through the issuance of General Revenue bonds and notes. The ILP program policies include a provision for a rate stabilization reserve and a provision for rate adjustments if necessary. UW Medical Center signed an ILP financing agreement to fund the Montlake Tower expansion project (Expansion Project) in fiscal year As part of this financing agreement with the ILP, UW Medical Center has agreed to maintain a debt service coverage ratio of 1.25 and days cash on hand of 75 days. Management believes it was in compliance with these financial ratios at June 30, 2014 and This ILP financing agreement specifies the debt to be repaid over a 30-year period at a 5.5% interest rate. UW Medical Center borrowed $13.6 million and $26.9 million from the ILP for the Expansion Project in fiscal years 2014 and 2013, respectively. Per the ILP policies and the financing agreement, the loan balance and interest owed are calculated monthly using a 5.5% interest rate. During construction, interest owed is paid monthly; UW Medical Center began repaying loan principal for the loan on January 1, All other debts borrowed from ILP have interest rates ranging from 3.5% to 5.0% and have annual maturities of varying amounts between fiscal years 2015 and (Continued)

186 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (b) Long-Term Debt Maturities, Excluding Capital Leases The following schedule shows debt service requirements, excluding capital leases, for the next five years and thereafter, as of June 30, 2014, using the fixed interest rates, for both principal and interest (in thousands): Principal Interest Total 2015 $ 9,052 11,933 20, ,285 11,457 19, ,745 11,015 19, ,194 10,551 19, ,639 10,063 19, ,755 42,118 97, ,429 28,346 68, ,089 16,681 63, ,315 3,868 34,183 Thereafter 5,466 1,104 6,570 Total payments $ 223, , ,105 (c) Capital Leases In fiscal year 1994, UW Medical Center entered into a capital lease with the UW Alumni Association for the UW Medical Center Roosevelt Clinic land and building. The lease specifies that at the end of the 20-year lease term the building and land will become the property of UW Medical Center. The capital lease expired in August UW Medical Center has entered into various other lease agreements for certain equipment. 35 (Continued)

187 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements Future minimum lease payments under these agreements are as follows (in thousands): Fiscal year ending June 30: 2015 $ Total minimum lease payments 1,536 Less amount representing interest (34) Net 1,502 Less current portion (744) Present value of capital lease, net of current portion $ 758 (d) Changes in Noncurrent Liabilities Changes in noncurrent liabilities during the fiscal years ended are summarized below (in thousands): Balance Balance Due June 30, June 30, within 2013 Increases Decreases 2014 one year Long-term debt, ILP Expansion $ 155,920 13,626 (3,343) 166,203 3,531 Long-term debt, ILP Others 61,271 (3,505) 57,766 5,521 Long-term debt, capital leases 4,232 (2,730) 1, Unearned revenue 2,098 3,126 (571) 4,653 Total noncurrent liabilities $ 223,521 16,752 (10,149) 230,124 9, (Continued)

188 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements Balance Balance Due June 30, June 30, within 2012 Increases Decreases 2013 one year Long-term debt, ILP Expansion $ 131,957 26,874 (2,911) 155,920 3,344 Long-term debt, ILP Others 64,685 (3,414) 61,271 3,506 Long-term debt, capital leases 4,943 1,487 (2,198) 4,232 2,730 Unearned revenue 2,098 2,098 Total noncurrent liabilities $ 201,585 30,459 (8,523) 223,521 9,580 (8) Risk Management UW Medical Center is exposed to risk of loss related to professional and general liability, employee medical, dental and pharmaceutical claims, and injuries to employees. UW Medical center participates in risk pools managed by the University to mitigate risk of loss related to these exposures. (a) Professional and General Liability The University s professional liability program currently includes self-insured and commercial reinsurance coverage components. UW Medical Center s annual funding to the professional liability program is determined by the University administration using information from an annual actuarial study. The actuary used a discount rate of 5.5% for both 2014 and 2013 in recognition of the expected earnings of the self-insurance fund and other factors. In addition to the University, the participants in the professional liability program include UW Medical Center, UWP, CUMG, UWNC, School of Dentistry, Airlift, Northwest Hospital, and Harborview. The various participants in the program contribute to the self-insurance fund and share in the expenses of the Health Sciences Risk Management Office. UW Medical Center s contribution to the professional liability program was $3.4 million and $3.2 million in 2014 and 2013, respectively, recorded in the supplies and other on the statements of revenues, expenses, and changes in net position. (b) Employee Medical and Workers Compensation The University pools employee benefit costs, including employee medical and workers compensation, for all University employees. Departments, divisions, agencies, and affiliated organizations with employees covered under University benefit programs are charged a single benefit rate, based on employee salary class. (9) Benefit Costs UW Medical Center, as a division of the University with employees covered under University benefit programs, participates in the benefit pool. See further discussion in note 9. Benefit costs are pooled centrally for all University employees. Annually, the University reviews total employee benefit costs and prepares standard benefit load rates by employment classification. 37 (Continued)

189 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements Departments, divisions, agencies, component units, and related parties of the University that have University employees qualifying for employee benefit coverage are charged a cost allocation using the determined benefit load rate and budgeted salary dollars by employment classification. All funding of obligations are on a pay-as-you-go basis. At the end of the reporting period, the cost allocation is compared to actual benefit costs and differences between actual and budgeted costs are included as a component of the benefit load rates charged in the following year. Employee benefits covered under the benefit pool include the following: Workers compensation Unemployment compensation Employee medical, dental and vision Retirement and other postretirement benefit plans Social security Medicare Separation leave During the fiscal years ended, UW Medical Center incurred and paid $100.0 million and $109.6 million to the University for all of the employee benefits listed above, which is recorded as employee benefits in the statements of revenues, expenses, and changes in net position. Retirement and Other Postretirement Benefit Plans UW Medical Center employees can participate in the following state and University sponsored retirement and other postretirement benefit plans: Washington Public Employees Retirement System (PERS) PERS is a cost sharing, multiple-employer, defined-benefit pension plan administered by the state of Washington Department of Retirement Systems. There are three separate plans covered under PERS. PERS Plan 1 provides retirement and disability benefits and minimum benefit increases beginning at age 66 to eligible nonacademic plan members hired prior to October 1, PERS Plans 2 and 3 provide retirement and disability benefits and a cost-of-living allowance to eligible nonacademic plan members hired on or after October 1, In addition, PERS Plan 3 has a defined-contribution component, which is fully funded by employee contributions. The authority to establish and amend benefit provisions resides with the legislature. The Department of Retirement Systems issues a publicly available financial report that includes financial statements and required supplementary information for PERS. The report may be obtained by writing to the Department of Retirement Systems, P.O. Box 48380, Olympia, WA , or visiting administration/. The Office of the State Actuary, using funding methods prescribed by statute, determines actuarially required contribution rates for PERS. Funding obligations are measured at the University level and 38 (Continued)

190 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements the University allocates expense to departments, divisions, agencies, and component units through the benefit load. Based on the University s benefit load apportionment UW Medical Center incurred and paid $22.4 million and $19.5 million in fiscal years 2014 and 2013, respectively, related to annual PERS funding, which is recorded in employee benefits on the statements of revenues, expenses and changes in net position. University of Washington Retirement Plan (UWRP) UWRP is a defined-contribution plan administered by the University. All faculty and professional staff are eligible to participate in the plan. Contributions to UWRP are invested by participants in annuity contracts or mutual fund accounts offered by one or more fund sponsors. Employees have at all times a 100% vested interest in their accumulations. Benefits from fund sponsors are available upon separation or retirement at the member s option. RCW 28B et. Seq. assigns the authority to the University of Washington Board of Regents to establish and amend benefit provisions. Funding is determined by employee age and ranges from 5% to 10% of employee salary. Funding obligations are calculated at the University level and the University allocates expense to department, divisions, agencies, and component units through the benefit load. Based on the University s benefit load apportionment UW Medical Center incurred and paid $3.9 million and $4.7 million in fiscal years 2014 and 2013, respectively, related to annual UWRP funding, which is recorded in employee benefits on the statements of revenues, expenses and changes in net position. University of Washington Supplemental Retirement Plan (the 401(a) Plan) The 401(a) Plan provides for a supplemental payment component, which guarantees a minimum retirement benefit based upon a one-time calculation at each eligible participant s retirement date. The University makes direct payment to qualifying retirees when the retirement benefits provided by UWRP do not meet the benefit goals. The University receives an independent actuarial valuation to determine funding needs for the supplemental payment component of UWRP. The funding obligation is determined at the University level and the University allocates expense to departments, divisions, agencies, and component units through the benefit load. Based on the University s benefit load apportionment UW Medical Center incurred and paid $1.4 million and $2.3 million in fiscal years 2014 and 2013, respectively, related to annual 401(a) Plan funding, which is recorded in employee benefits on the statements of revenues, expenses, and changes in net position. Other Post-Employment Benefits (OPEB) All University employees, including medical center employees, are eligible for participation in healthcare and life insurance programs administered by the WSHCA. UW Medical Center retirees may elect coverage through state health and life insurance plans, for which they pay less than the full cost of the benefits based on their age and other demographic factors. 39 (Continued)

191 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (10) Related Parties The Office of the State Actuary determines total OPEB obligations at the State level using individual state employee data, including age, retirement eligibility and length of service. Information to support actuarial calculations at the division, department or component unit level is not available. The State is ultimately responsible for the obligation; therefore, the annual required contribution (ARC) is not recorded at the University or its departments, divisions, agencies, or component units. UW Medical Center has engaged in a number of transactions with related parties. These transactions are recorded by UW Medical Center as either revenue or expense transactions because economic benefits are either provided or received by UW Medical Center. UW Medical Center records cash transfers between UW Medical Center and related parties that are not the result of economic benefits and are presented as other, net on the statements of revenues, expenses, and changes in net position. (a) University of Washington University divisions provide various levels of support to UW Medical Center. The following is a summary of services purchased. UW School of Medicine UW Medical Center purchases a variety of clinical and administrative services from the School, which includes laboratory services and resident and faculty support. UW Medical Center also transfers a portion of its Medicare reimbursement for medical education to the School in support of teaching costs. The amounts for these services are shown below (see (f)). Chief Health System Officer/Vice President of Medical Affairs The office of the Chief Health System Officer/Vice President of Medical Affairs (VPMA) provides services to UW Medical Center such as news and community relations staffing, medical staff oversight, marketing, information systems services, and other administrative services. The amounts for these services are shown below (see (f)). UW Physicians Network dba UW Neighborhood Clinics Under an annual agreement between the involved UW Medicine entities, UW Medical Center provides strategic support of approximately 80% and 85% of the Clinic s annual operating loss and capital funding needs for fiscal years 2014 and 2013, respectively. Funding from UW Medical Center to UWNC was $18.9 million for fiscal year 2014 and $18.6 million for fiscal year 2013, and is recorded as a nonoperating expense in the statements of revenues, expenses, and changes in net position. Included in the amounts above, capital funding of $1.3 million and $1.0 million was made by UW Medical Center to UWNC for fiscal 2014 and 2013, respectively. University of Washington Consolidated Laundry UW Medical Center purchases laundry services from University of Washington Consolidated Laundry (the Laundry). Additionally, the Laundry transfers funds to UW Medical Center for the purposes of satisfying debt and capital accumulation requirements and excess funds for investment 40 (Continued)

192 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements with the UW Medical Center s funds held by UW. UW Medical Center records these amounts as payables to the Laundry. The amounts for these transactions are shown below (see (f)). Other Divisions of the University In addition to the divisions and transactions identified above UW Medical Center purchases information technology services, general and professional liability insurance, printing, accounting, temporary staffing, and other administrative and operational services from other divisions of the University. The amounts for these transactions are shown below (see (f)). (b) UW Medicine/Northwest dba Northwest Hospital & Medical Center Northwest Hospital, a 281-bed full-service acute care hospital, is a discretely presented component unit of the University. Under the University s affiliation agreement with Northwest Hospital, UW Medical Center reallocates funds received under the original Washington State safety net program to Northwest Hospital to hold it harmless for the transition from being a stand-alone hospital to a hospital that is part of a multihospital system. UW Medical Center provided funding in fiscal year 2013 towards the Regional Heart Center s electrophysiology expansion. Investment in this expansion was $8.2 million in fiscal year 2013, and was recorded in nonoperating other expenses in the statements of revenues, expenses, and changes in net position. 41 (Continued)

193 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (c) Seattle Cancer Care Alliance UW Medical Center is a one-third owner in the Seattle Cancer Care Alliance (SCCA) and accounts for its interest under the equity method of accounting. Nonoperating income of $11.7 million and $6.9 million related to SCCA results was recorded in fiscal year 2014 and 2013, respectively and is included in investment income in the statements of revenues, expenses, and changes in net position. The following is a summary of the SCCA s financial results for the years ended June 30 (in thousands): Assets $ 488, ,985 Liabilities $ 170, ,923 Unrestricted net assets 315, ,810 Temporarily restricted net assets 1,489 1,366 Permanently restricted Total liabilities and net assets $ 488, ,985 Revenues $ 435, ,731 Expenses 408, ,819 Nonoperating income 7,689 (23,334) Excess of revenues over expenses 34,762 6,578 Net assets released from restriction used for capital acquisitions 85 Grant contributions restricted for capital acquisition Change in net unrealized loss on investments (26) (285) Change in value of unconsolidated subsidiary 13,538 Increase in unrestricted net assets $ 35,006 20,656 SCCA operates a 20-bed unit located within UW Medical Center in which its adult inpatients receive care. The 20-bed unit qualifies as a hospital within a hospital for Medicare Reimbursement purposes. SCCA provides medical oversight and management of the inpatient unit. Under agreements, UW Medical Center provides and bills for inpatient care services to the SCCA including necessary personnel, equipment, and ancillary services and UW Medical Center purchases administrative and program support services from the SCCA. Payments due to UW Medical Center for services provided to the SCCA inpatients in fiscal years 2014 and 2013 are included in net patient service revenues. UW Medical Center also provides various services to the SCCA s outpatient facility including certain pharmacy, laboratory, and pathology services as well as billing, purchasing, and other administrative services. Fees for such services and supplies provided by UW Medical Center are included in other revenue. The amounts for these transactions are shown below (see (f)). 42 (Continued)

194 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (d) (e) (f) Fred Hutchinson Cancer Research Center The SCCA partnership agreement provides that UW Medical Center will make various payments to FHCRC related to research and development support, data collection and analysis, physician assistance services, consulting services, and license rights to use the FHCRC name in connection with the inpatient oncology services program. These fees are included in other expenses and are included in the tables below (see (f)). Harborview Medical Center UW Medical Center provides services and support to Harborview such as administrative and operational services. Harborview provides UW Medical Center with services and support such as pharmacy refills and lab testing as well as other administrative and operational services. The amounts paid for these services are included in the tables below (see (f)). Summary of Related-Party Transactions (In Thousands) Revenue (expense) transactions Services and supplies purchased from the University and its departments and affiliates: The School $ (106,427) (89,696) VPMA (9,542) (8,814) The Laundry (4,277) (4,153) UWP (611) (275) Other University division and departments (82,153) (68,295) Services and supplies purchased from Harborview (1,731) (2,127) Services and supplies purchased from SCCA (13,796) (12,024) Services and supplies purchased from FHCRC (10,343) (11,979) Services and supplies provided to the University and its department and affiliates: The School 2,262 4,193 UWNC 2,252 2,099 Other University division and departments 376 Services and supplies provided to Northwest Hospital Services and supplies provided to SCCA 49,191 42,284 Services and supplies provided to Harborview 1,564 2, (Continued)

195 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements Related-party receivable and payable amounts are recorded in other receivables, accounts payable and accrued expenses, respectively. As of, respectively, UW Medical Center had net amounts (due to) or due from related parties for the various transactions, which are as follows (in thousands): Net receivable (payable) University of Washington and its departments and affiliates: The School $ (8,262) (8,029) VPMA (62) 261 The Laundry (355) (341) UWP UWNC 3,700 2,569 Other University divisions and departments (13,049) (8,760) SCCA 17,569 16,655 Northwest Hospital 6 (3,482) Harborview (359) (480) FHCRC (2,545) (2,983) (11) Commitments and Contingencies (a) Operating Leases UW Medical Center leases medical office space and equipment under operating lease arrangements. Total rental expense in fiscal years ended for all operating leases was $10.6 million and $9.8 million, respectively. The following schedule shows future minimum lease payments by fiscal years as of June 30, 2014 (in thousands): Fiscal year(s) ending June 30: 2015 $ 7, , , , , , , , , ,982 Total $ 65, (Continued)

196 UNIVERSITY OF WASHINGTON MEDICAL CENTER (A Division of the University of Washington) Notes to Financial Statements (b) (c) (d) (e) (f) Purchase Commitments UW Medical Center has current commitments at June 30, 2014 of approximately $12.9 million related to various construction projects, equipment purchases and information technology implementations. UW Medical Center intends to use its funds held by UW and ILP for these commitments. Regulatory Environment The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, governmental healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government agencies are actively conducting investigations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs, together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Medical Center is in compliance with the fraud and abuse regulations as well as other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions known or unasserted at this time. Litigation UW Medical Center is involved in litigation arising in the course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect to UW Medical Center s financial position or results of operations. Collective Bargaining Agreements UW Medical Center has a total of approximately 4,368 employees. Of this total, approximately 80% are covered by collective bargaining agreements as of. Nurses are represented by the Washington State Nurses Association and the Service Employees International Union and other healthcare and support workers are represented by the Service Employees International Union and Washington Federation of State Employees. All UW Medical Center collective bargaining agreements expire on June 30, Husky Stadium Lease In fiscal year 2013, UW Medical Center entered into a lease agreement with the University of Washington Department of Intercollegiate Athletics for approximately 30,660 square feet within the Husky Stadium. The space will be used for the UW Medicine Sports Medicine Clinic. The lease term is thirty years beginning September 1, 2013 ending on August 31, Annual rent expense will be between $0.8 million and $1.2 million. In addition to rent expense, UW Medical Center will pay monthly operating expenses that are assessed annually. 45

197 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Financial Statements (With Independent Auditors Report Thereon)

198 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Table of Contents Page Independent Auditors Report 1 Management s Discussion and Analysis (Unaudited) 3 Basic Financial Statements: Statements of Net Position 18 Statements of Revenues, Expenses, and Changes in Net Position 19 Statements of Cash Flows 20 Notes to Financial Statements 21

199 KPMG LLP Suite Eighth Avenue Seattle, WA Independent Auditors Report The Board of Trustees Harborview Medical Center: We have audited the accompanying basic financial statements of the business-type activities of Harborview Medical Center, a discretely presented component unit of King County, which comprise of the statements of net position as of, and the related statements of revenues, expenses, and changes in net position, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these basic financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of basic financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these basic financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the basic financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the basic financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the basic financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the basic financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the basic financial statements referred to above present fairly in all material respects, the financial position of the business-type activities of Harborview Medical Center as of June 30, 2014 and 2013, and the changes in its net position and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

200 Other Matters U.S. generally accepted accounting principles require that the Management s Discussion and Analysis on pages 1 and 15 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with U.S. generally accepted accounting principles, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Seattle, Washington October 31,

201 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) The following discussion and analysis provides an overview of the financial position and activities of Harborview Medical Center (Harborview), for the years ended. This discussion has been prepared by management and is designed to focus on current activities, resulting changes, and current known facts and should be read in conjunction with the financial statements and accompanying notes that follow this section. Harborview is a discretely presented component unit of King County and a part of UW Medicine through the management contract that includes: UW Medical Center, Northwest Hospital & Medical Center (Northwest Hospital), Valley Medical Center (VMC), UW Physicians Network dba UW Neighborhood Clinics (UWNC), UW Physicians (UWP), the UW School of Medicine (the School), and Airlift Northwest (Airlift). Financial Highlights for Fiscal Year 2014 Harborview recorded a decrease in net position of $6.8 million in fiscal year 2014; an improvement of $6.4 million from the negative change in net position of $13.2 million in The improved change in net position primarily relates to improved reimbursement associated with a higher-intensity inpatient case mix and expansion of Medicaid program eligibility. In addition, strong outpatient revenue in the pharmacy department and continued success in implementing process improvement initiatives in the areas of revenue cycle, supply chain and resource utilization helped to offset the impact of lower than expected admissions and flat inpatient surgical volumes (In thousands) Total operating revenues $ 814, , ,800 Total operating expenses 815, , ,525 Operating (loss) income (784) (8,485) 18,275 Investment income, net 2,670 2,737 1,259 Interest expense (161) (217) (224) Other, net (8,855) (8,345) (11,638) Nonoperating expenses (6,346) (5,825) (10,603) Capital contributions and transfers 328 1, (Decrease) increase in net position (6,802) (13,234) 8,535 Net position, beginning of year 622, , ,168 Net position, end of year $ 615, , ,703 During fiscal year 2014, the Washington state Medicaid program was expanded which significantly increased the number of Medicaid enrollees receiving benefits. With the increase of eligible Medicaid enrollees, Harborview has seen a decline in the number of self-pay patients and charity care applicants as many of these patients are now eligible for Medicaid. 3 (Continued)

202 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) Harborview is continuing to invest in information technology. During fiscal year 2014, UW Medicine implemented EpicCare, a specialty clinics medical record and computerized physician order system. Harborview management implemented cost saving enterprise-wide initiatives through the process improvement program focusing on the standardization of high volume/high dollar medical supplies and equipment. Factors Affecting the Future UW Medicine Strategic Planning Strategic Collaborations In September 2013, UW Medicine signed a strategic collaboration with PeaceHealth for UW Medicine to serve as PeaceHealth s complex tertiary and quaternary health system for specialty care not available in their community. The agreement will also allow both organizations to work together on improving the quality, safety and cost-effectiveness of care. The two organizations will remain legally independent and there is no change in the governance or mission of either organization. In March 2014, UW Medicine and Capital Medical Center (Olympia, WA) signed an agreement selecting UW Medicine as the healthcare system of choice for complex tertiary and quaternary care for Capital Medical Center patients. This strategic collaboration, effective April 1, will provide Capital Medical Center patients prompt access to the highest level of care for advanced services while allowing the organizations to work together to continue improving the quality, safety and cost-effectiveness of care in the South Sound. UW Medicine Accountable Care Network In 2014, UW Medicine formed an accountable care network (ACN) with certain other health care organizations and healthcare professionals in Western Washington to work together to assume responsibility for the healthcare of particular populations of patients to achieve the Triple Aim: improved healthcare experience for the individual, improved health of the population, and more affordable care. The UW Medicine Accountable Care Network will focus on keeping people healthy and out of the hospital by employing evidence-based preventive measures to identify and treat underlying health problems early before they become chronic conditions. UW Medicine and its Network members entered into agreements to provide health care services to employees of The Boeing Company beginning in January The arrangement provides an opportunity for shared savings between the ACN and Boeing based on achieving quality and financial benchmarks. If certain financial benchmarks are not attained, UW Medicine, along with contractually agreed upon risk sharing payments from its Network members, will pay Boeing based on the agreement. Employee Costs Rising employee benefit costs, particularly for healthcare and pensions, continue to impact Harborview. Employer pension funding rates are expected to increase 9.2% in 2014 to 10.0% of covered salary in 2015, and are likely to continue increasing over the next few years. 4 (Continued)

203 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) UW Medicine Patients Are First UW Medicine is committed to its mission of improving the health of the public. Patients Are First was launched across UW Medicine as the organizational framework for delivering consistent quality and service excellence to every patient, every time. Through Patients Are First, UW Medicine creates better leaders, refines metrics to support systems of accountability, and provides employees and physicians with the tools, tactics, and reports to achieve its strategic outcomes. UW Medicine relies on the following four pillars as the foundation for building its Patients Are First culture: Focus on Serving the Patient & Family: serve all patients and family members with compassion, respect, and excellence Provide the Highest Quality Care: provide the highest quality, safest and most effective care to every patient, every time Become the Employer of Choice: recruit and retain a competent, professional workforce focused on serving our patients and their families Practice Fiscal Responsibility: ensure effective financial planning and the economic performance necessary to invest in strategies that improve the health of our patients Each pillar has several measurable core goals that, when cascaded throughout the entire health system and teamed with other evidence-based leadership tactics, hardwire commitment to Patients Are First. UW Medicine engaged a national expert consultant group, Studer Group, LLC, in 2010 to implement its evidence-based leadership program that improves service, satisfaction, quality, and safety while reducing costs. The current contract with Studer Group runs through fiscal year Using the Financial Statements Harborview s financial statements consist of three statements: statements of net position; statements of revenues, expenses, and changes in net position; and statements of cash flows. These financial statements and related notes provide information about the activities of Harborview, including resources held by Harborview but restricted for specific purposes by contributors, grantors, or enabling legislation. The statements of net position includes all of Harborview s assets and liabilities, using the accrual basis of accounting, as well as an indication about which assets can be used for general purposes and which are designated for a specific purpose. The statements of net position also include information to help compute the rate of return on investments, evaluate the capital structure of Harborview, and assess the liquidity and financial flexibility of Harborview. The statements of revenues, expenses, and changes in net position reports all of the revenues and expenses during the time period indicated. Net position, the difference between the sum of assets and the sum of liabilities, is one way to measure the financial health of Harborview and whether the organization has been able to recover all its costs through net patient service revenues and other revenue sources. 5 (Continued)

204 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) The statements of cash flows reports the cash provided by Harborview s operating activities, as well as other cash sources such as investment income and cash payments for capital additions and improvements. These statements provide meaningful information on where Harborview s cash was generated and what it was used for. Financial Analysis Net Position The table below is a presentation of certain condensed financial information derived from Harborview s net position as of the fiscal years ended June 30, 2014, 2013 and (In thousands) Current assets $ 285, , ,534 Noncurrent assets: Capital assets, net 331, , ,406 Funds held by UW Assets whose use is limited 113, , ,734 Other assets 10,865 Total assets 741, , ,274 Current liabilities 108,860 91,614 89,370 Noncurrent liabilities 16,996 18,183 19,201 Total liabilities 125, , ,571 Net position $ 615, , ,703 Total assets were $741.5 million at June 30, 2014 compared to $732.3 million at June 30, 2013, an increase of $9.2 million. Significant events within total assets during fiscal year 2014 included an increase in cash and cash equivalents due to positive cash flows from operating activities. Overall net position decreased $6.8 million during the same fiscal year primarily as a result flat volumes. Total assets decreased $12.0 million from June 30, 2012 to June 30, 2013 as a result of focused reductions in capital spending to ensure contained liquidity despite operating losses during the fiscal year. Net position decreased $13.2 million in fiscal year 2013 as a result of operating losses experienced during the period driven by lower than anticipated inpatient volumes. 6 (Continued)

205 Days HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) Current Assets 1% 3% 43% 6% 1% 2% Current Assets - Fiscal year 2014 Cash and cash equivalents 44% Patient AR Other receivables Supplies inventory Funds held by the University of Washington Receivable from contractual agencies Other Current Assets Current Assets consist of cash and cash equivalents, and other current assets that are expected to be converted to cash within a year. Total current assets were $285.6 million, $262.9 million, and $248.5 million at fiscal year-ends 2014, 2013, 2012, respectively. Fiscal year 2014 composition of current assets is illustrated in the chart to the left. Cash and cash equivalents represent amounts invested in the King County Investment Pool (the KCIP) on behalf of Harborview. All amounts invested in the KCIP are available upon demand and, as such, are considered cash equivalents. Harborview s investment in the KCIP is split between cash and cash equivalents and assets whose use is limited in the statements of net position. Cash and cash equivalents increased $21.3 million in 2014 from $104.4 million at June 30, 2013 to $125.7 million at June 30, 2014 and decreased $4.0 million in 2013 from $108.4 million at June 30, 2012 to $104.4 million at June 30, Days cash on hand is utilized to evaluate an organization s continuing ability to meet its short-term operating needs. Days cash on hand, including board-designated assets whose use is limited, as of June 30, 2014, 2013 and 2012 are illustrated in the graph to the right Days Cash on Hand Harborview s total days cash on hand, including board-designated assets whose use is limited, increased 8.5 days from 93.4 days at June 30, 2013 to days at June 30, 2014 and decreased 11.8 days from days at June 30, 2012 to 93.4 days at June 30, The increase in 2014 was driven by Medicaid expansion and positive cash flow from operating activities. In 2014, days cash on hand is favorably impacted by the State s Medicaid payment methodology, which will be factored into the CPE hold harmless estimate. The decrease in 2013 was driven by growth in operating expenses and capital spending in excess of cash flows from operations during the year. Net patient accounts receivable was $123.2 million as of June 30, 2014, compared to $114.5 million at June 30, The increase of $8.7 million in net accounts receivable during fiscal year 2014 is due to the expansion of Moody's "Baa" (Continued)

206 Days HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) Washington State Medicaid program, which provided an increase in Medicaid eligible patients and a decrease in self-pay patients Net Days Receivable Outstanding Moody's "Baa" Net patient accounts receivable increased $4.2 million during fiscal year 2013 is due to changes in payer mix and is also representative of the higher level of scrutiny that payers are subjecting claims to that is increasing the time to collect on patient accounts. Days receivable outstanding illustrates an organization s ability to convert net patient service revenue to cash. Days receivable outstanding as of June 30, 2014, 2013 and 2012 are illustrated in the graph included to the left. Harborview s net days receivable outstanding increased 2.4 days from 57.7 days at June 30, 2013 to 60.1 days at June 30, 2014 and increased 0.4 days from 57.3 days at June 30, 2012 to 57.7 days at June 30, The increase in net days receivable outstanding during fiscal year 2014 was driven by increased reimbursement time for Medicaid expansion claims and the Hospital Safety Net program funding being presented as other operating revenue in the form of grant revenue rather than net patient service as it has historically been presented. The increase during fiscal year 2013 was driven by higher initial denial rates by payers and increasing work required to get services reimbursed under payer contracts. As of, 39% and 41% of the gross patient accounts receivable balance is due from commercial payers, 55% and 49% is due from governmental payers Medicare and Medicaid, 5% and 10% is due from self-pay patients and 1% from the Washington Health Benefit Exchange. On January 1, 2014, the Washington state Medicaid program was expanded to significantly increase the number of eligible Medicaid enrollees receiving benefits. Due to this expansion, Harborview has seen an increase in Medicaid gross patient accounts receivable and a decrease in self-pay gross accounts receivable at June 30, 2014, when compared to the previous fiscal year. Other receivables primarily consist of amounts due from the State for grants and other funding programs supporting Harborview operations. Other activity within other receivables includes amounts due from UW Medicine entities. Other receivables decreased $6.6 million from $23.3 million at June 30, 2013 to $16.7 million at June 30, The decrease during fiscal year 2014 is due to the timing of state funding as well as the elimination of the Medicaid Administrative Match program. During fiscal year 2013, other receivables increased $5.1 million. The change is a result of accrued State grants and trauma funding. Supplies Inventory was $8.6 million as of June 30, 2014, compared to $7.7 million at June 30, The increase of $0.9 million was the result of general inventory movement and timing of stock reorders. 8 (Continued)

207 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) The balance of supplies inventory decreased $0.6 million in 2013 as a result of general inventory movement and timing of stock orders. Funds held by the University of Washington (the University) represent deposits held with the University for advance funding of capital projects managed by the University. Receivable from contractual agencies consist of estimated receivables for cost report settlements. Receivable from contractual agencies decreased $7.3 million from $9.9 million as of June 30, 2013 to $2.6 million as of June 30, 2014 as a result of a decrease in Medicare and Medicaid CPE reports settlements and development in open Medicare cost report and CPE hold harmless estimates. During fiscal year 2013, receivables from contractual agencies increased $8.8 million as a result of changes in Harborview s reserve methodology and development in open CPE hold harmless estimates. Other current assets include prepaid expenses and interest receivable. The increase in other current assets of $5.6 million relates to Harborview s current portion of IT prepaid expenses. See further discussion below in other assets. The remaining balance of other current assets remained unchanged from the prior year. Noncurrent Assets Capital assets net of accumulated depreciation, decreased $23.4 million during fiscal year 2014 from $354.8 million at June 30, 2013 to $331.4 million at June 30, 2014 and decreased $18.6 million from $373.4 million at June 30, 2012 to $354.8 million at June 30, The decrease in both years was primarily due to continued depreciation of depreciable assets offset by moderate capital spending. Additional discussion regarding capital asset activity during the fiscal years can be found in the notes to the financial statements. Assets whose use is limited (AWUL) includes board-designated, restricted investments and property held for future development. These investments include cash, long-term investments and property held for future use. Board-designated cash and investments are used by AWUL -Fiscal year 2014 Harborview to fund strategic initiatives, capital 3% improvements, and to purchase equipment. 10% 8% 9% 1% Commuter Service Fund Self-insurance Reserve Fund Board-designated Capital Funds Investments Restricted for Capital by King County At June 30, 2014, total assets whose use is limited were $113.1 million, compared to $113.9 million at June 30, 2013, a decrease of $0.8 million between years. Assets whose use is limited decreased $7.8 million during fiscal year 2013 due to funding of strategic initiatives and capital improvements. 69% Donor-restricted Investments Other Other assets consist of long-term prepaid expenses. Beginning in July 2013, UW Medicine ITS (a department of the UW) began recording enterprise-wide information technology (IT) capital assets that are purchased for use by UW Medicine 9 (Continued)

208 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) entities. Previously, IT capital assets were recorded by Harborview. The long-term prepaid expense reflected in other assets of $10.9 million at June 30, 2014 entitles Harborview access to the enterprise-wide IT software and services. Current Liabilities Current liabilities consist of accounts payable and other accrued liabilities that are expected to be paid within a year. Total current liabilities were $108.9 million at June 30, 2014, compared to $91.6 million at June 30, Fiscal year 2014 composition of current liabilities is illustrated in the chart to the right. Accounts payable and accrued expenses increased $1.8 million from $18.0 million at June 30, 2013 to $19.8 million at June 30, 2014 and increased $1.8 million from $16.2 million at June 30, 2012 to $18.0 million at June 30, Changes in accounts payable and accrued expenses are primarily driven by timing of payments to vendors and employees. Accounts payable includes amounts accrued for capital related expenditures. Included in accounts payable as of were amounts accrued for capital related expenditures of $0.4 million and $1.7 million, respectively. Accrued salaries, wages and employee benefits decreased $2.5 million from $44.7 million at June 30, 2013 to $42.2 million at June 30, 2014 and increased $2.1 million from $42.6 million at June 30, 2012 to $44.7 million at June 30, Payable to contractual agencies consists of estimated reserves for cost report settlements and amounts due as intergovernmental transfers to the Washington State Department of Social and Health Services. Payable to contractual agencies increased $5.4 million from $21.0 million at June 30, 2013 to $26.4 million at June 30, 2014 and decreased $0.8 million from $21.8 million at June 30, 2012 to $21.0 million at June 30, The increase in fiscal year 2014 was driven by the development in open Medicare cost report and CPE hold harmless estimates. The decrease in fiscal year 2013 was driven by changes in Harborview s reserve methodology, settlement of Medicare and Medicaid CPE reports and development in open Medicare cost report and CPE hold harmless estimates. Payable to the University of Washington (the University) consists of amounts due for services provided to Harborview through the University and UW Medicine administrative and information technology support. Due to the University increased $12.5 million from $6.5 million at June 30, 2013 to $19.0 million at June 30, 2014 and decreased $0.9 million from $7.4 million at June 30, 2012 to $6.5 million at June 30, The increase in the payable to the University was driven by timing of invoices to the School of Medicine and to UW Medicine ITS for invoices related to operating expenses of the IT department. The decrease in 2013 was a result of timing in settlement between Harborview and the University. 22% 18% 1% 1% Current Liabilities-Fiscal year % 40% Accounts payable and accrued expenses Accrued salaries, wages and employee benefits Payable to contractual agencies Due to the University of Washington Other current liabilities Current portion of long-term debt 10 (Continued)

209 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) Current portion of long-term debt was $0.8 million as of June 30, 2014 and represents upcoming debt payments on various bond issues within the next year. The current portion of long-term debt as of June 30, 2013 was $0.7 million. Other current liabilities consist of the current portion of long-term unearned rent related to the Pat Steel Building and Ninth & Jefferson Building leases. Noncurrent Liabilities 60.0% 45.0% 30.0% 15.0% 0.0% Long-term Debt to Capitalization Ratio Long-term liabilities consist of long-term debt and unearned rent. Long-term debt as of June 30, 2014, 2013, and 2012 consists of bonds issued by King County. Long-term debt to capitalization is a ratio used to evaluate capital structure of healthcare organizations. The graph to the left shows the long-term debt to capitalization ratio as of June 30 for 2014, 2013 and 2012 including a comparison to the stand-alone hospital median. Historically, Harborview s significant construction projects have been funded through tax payer supported debt. As a policy, King County carries all tax payer supported debt and proceeds of debt are funded to Harborview through a voluntary nonexchange transaction. Debt carried by Harborview represents debt issued and supported through Harborview revenues. As a result of these policies, Harborview tends to report a significantly lower debt to capitalization ratio than other academic medical centers. Additional discussion regarding long-term debt activity during the fiscal years can be found in the notes to the financial statements. Net Position 43.0% 2013 Moody's "Baa" 0.5% 0.6% 0.7% Harborview reports its net position in four categories: Net investment in capital assets Total investment in Harborview property, plant, and equipment net of accumulated depreciation and outstanding debt obligations related to those capital assets. Restricted for debt service and expendable net position Resources Harborview is legally or contractually obligated to spend in accordance with restrictions placed by donors and/or external parties that have placed time or purpose restrictions on the use of the asset. 11 (Continued)

210 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) Restricted nonexpendable net position Resources subject to externally imposed restrictions requiring Harborview to maintain in perpetuity. Unrestricted net position All other funds available to Harborview that do not meet the definition of restricted or invested in capital net of related debt. As of June 30, 2014, total net position was $615.7 million compared to $622.5 million at June 30, Summary of Revenues, Expenses, and Changes in Net Position Results of Operations Harborview reported an operating loss of $0.8 million and a decrease in net position of $6.8 million for the year ended June 30, 2014 compared to an operating loss of $8.5 million and decrease in net position of $13.2 million for the year ended June 30, For the year ended June 30, 2012, Harborview reported operating income of $18.3 million and an increase in net position of $8.5 million (In thousands) Total operating revenues $ 814, , ,800 Total operating expenses 815, , ,525 Operating (loss) income (784) (8,485) 18,275 Investment income, net 2,670 2,737 1,259 Interest expense (161) (217) (224) Other, net (8,855) (8,345) (11,638) Nonoperating expense (6,346) (5,825) (10,603) Capital contributions and transfers 328 1, (Decrease) increase in net position (6,802) (13,234) 8,535 Net position, beginning of year 622, , ,168 Net position, end of year $ 615, , ,703 Contributing factors for the improved performance in fiscal year 2014 included the following: improved reimbursement associated with a higher-intensity inpatient case mix and expansion of the Medicaid program eligibility. In addition, strong outpatient revenue in the Pharmacy Department and continued success in implementing process improvement initiatives in the areas of revenue cycle, supply chain and resource utilization helped offset the impact of lower admissions and flat inpatient surgical volumes. 12 (Continued)

211 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) Decreased patient volumes offset by federal and state funding programs, such as electronic health record incentive payments and Hospital Safety Net Assessments contributed to the unfavorable operating performance between fiscal years 2013 and Available beds Admissions 17,176 17,999 19,094 Patient days 132, , ,930 Average length of stay Occupancy 88% 90% 89% Case mix index (CMI) Surgery cases 15,938 15,488 15,175 Emergency room visits 64,512 66,285 62,432 Primary care clinic visits 83,148 82,873 82,850 Specialty care clinic visits 164, , ,114 Full time equivalents (FTEs) 4,475 4,763 4,684 Trauma cases 5,888 6,248 5,982 Total Operating Revenues Total operating revenues consists primarily of net patient service revenues and other operating revenues. Net patient service revenues are recorded based on standard billing rates less contractual adjustments, charity, and a provision for uncollectible accounts. Harborview has agreements with federal and state agencies, and commercial insurers that provide for payments at amounts different from gross charges. Harborview provides care at no charge or reduced charges to patients who qualify under Harborview s charity policy. Harborview also estimates the amount of accounts receivable due from patients that will become uncollectible which is also reported as a reduction of net patient service revenues. The difference between gross charges and the estimated net realizable amounts from payers and patients is recorded as an adjustment to charges. The resulting net patient service revenue is shown in the statements of revenues, expenses, and changes in net position. Net patient service revenues comprise both inpatient and outpatient revenue. Outpatient revenue consists of both hospital-based and other clinic network revenue. Other operating revenue comprises hospital-related revenues such as the grants and contract revenue as well as parking and cafeteria revenues. 13 (Continued)

212 HARBORVIEW MEDICAL CENTER (A Component Unit of King County) (Operated by the University of Washington) Management s Discussion and Analysis (Unaudited) 30% 7% 1% 29% Payer Mix - Fiscal year 2014 Commercial 33% Medicare Medicaid Self-pay Exchange (HIX) Harborview s payer mix is a key factor in the overall financial operating results. The chart to the left illustrates payer mix for For the year ended, Medicaid revenue represented 30% and 24% and self-pay revenue represented 7% and 12%, respectively. This increase in Medicaid revenue is a direct result of the expansion of the Medicaid program in Washington State as part of the Affordable Care Act. Due to Medicaid expansion, many patients who were previously self-pay now qualify for Medicaid coverage, thus there is a decrease in the number of applicants for charity care and a decrease in the cost of charity care provided. Reimbursement from governmental payers is generally below commercial rates and reimbursement rules are complex and subject to both interpretation and settlements. With the expansion of Medicaid, Harborview will have higher government revenues which are subject to settlements. For the years ended June 30, 2014, 2013 and 2012, Harborview s total operating revenues were $814.7 million, $788.4 million and $765.8 million, which was composed of $747.9 million, $724.3 million and $702.3 million in net patient service revenues and $66.8 million, $64.1 million and $63.5 million of state appropriations and other operating revenue, respectively. The increase in fiscal year 2014 was driven by an increase in net patient service revenues due to increases in case acuity and a greater number of eligible Medicaid patients. The increase in fiscal year 2013 was driven by an increase in net patient service revenues due to a price increase and increases in high acuity and trauma cases. Total Operating Expenses Total operating expenses were $815.4 million for fiscal year 2014 compared to $796.9 million for fiscal year 2013 and $747.5 million for fiscal year The composition of fiscal year 2014 operating expenses is illustrated in the chart to the right. Effective July 2013, UW Medicine adopted a purchased service model for their shared services function related to information technology services. With this adoption, Harborview s allocation of IT operating costs are recorded as purchased services in Previously, IT operating costs allocated to Harborview were recorded as salaries and wages, benefits and purchased services expense. 21% 21% Operating Expenses -Fiscal year % Salaries and wages 40% Employee benefits Purchased services Supplies and other Depreciation 13% 14 (Continued)